An Idea For Leasing Farmland Now, And Finalizing The Rent Later.
It may seem like we’re rushing the season, but both farm operators and landowners are probably thinking year around about calculating a fair rent the next time a farm lease is signed. While the leasing season begins after harvest and extends to about planting time across the Cornbelt, just about anytime is appropriate to discuss what is fair for both sides and offers the flexibility that variable yields and volatile prices demand. Let’s take a look at one option that can be tried and tested until it is time to sign on the dotted line.
The movement away from crop share leases and toward cash rent leases created havoc in determining what is a fair rent for farmland, particularly in a time of unprecedented grain price volatility. Agricultural law specialists Don Uchtmann and Bryan Endres offer one idea which adjusts cash rent with futures prices. The fluctuating market creates variability to the rent payment in line with the options that land operators and land owners have in marketing their grain.
Uchtmann and Endres suggest that a base cash rent be negotiated, then adjusted by the futures market, with an actual cash rent determined and set about March 1. They contend that land owners and operators, regardless of their locale, can obtain the necessary information to monitor the changes in rent between the time of negotiation and the time it is locked in at the outset of the planting season. The authors suggest that the flex factor could be indexed to input costs, county or actual yields, or other dynamics.
The ag law specialists suggest that an agreement can be signed at anytime stipulating a base cash price. At that time, there is a notation of the value of a specific futures contract, such as the Dec 2009 corn futures. When it is time to actually set the cash rent prior to planting, a subsequent notation is made about the value of the same futures contract, and the difference in those values would be used to adjust the base cash rent. The latter value could be an individual date or it could be the average closing prices over a period of time, such as USDA’s Risk Management Agency uses to determine crop insurance guarantees.
Uchtmann and Endres provide an example in which a $200 per acre base cash rent is negotiated in the fall when the December futures price for corn is at $6.50. On the date when the actual rent is set, the futures price is $7.15, which is a 10% increase that would be used to raise the base rent from $200 to $220 for the actual rent.
They contend an early date of signing a lease would provide continuity, and allow the operator to take care of any fall tillage, fertilizer application, pre-payment of seed purchases and order crop protection chemicals at special prices. The land owner would not have to wait for the following spring to negotiate a higher rent that might reflect an upward movement in market prices. Additionally, the rent is set about the same time that crop insurance decisions are made and those can be adjusted to the needs of the lease.
The land owner should be aware that the rent would be applicable to self-employment tax, and the issue of agricultural use valuations would be important in estate planning. The third issue of dividing farm program payments should also be discussed with the FSA office, however, this variable cash rent lease is not dependent upon production or yield to determine the cash rent amount.
The success of the lease is dependent upon all parties understanding it and understanding how the parameters are calculated, such as which futures contract is used, and when payments are made. In an effort to keep everyone knowledgeable, everything in the lease, should be written, and examples possibly given. Uchtmann and Endres not only provide a detailed example, but even a sample letter from the operator to the landowner that explains all calculations of the payments being made and how the numbers were derived.
Summary:
With the complexity of the grain market and production problems caused by the weather, the creation of a fair and equitable cash rent lease can be a significant challenge for both the operator and landowner. To facilitate an early leasing of farmland in the fall, but without determining a final rent figure until next spring, it is possible to negotiate a base rent that can be adjusted with an index of the futures market activity. The final determination is made just before planting, which benefits the operator on crop insurance decisions, and allows fall tillage opportunity with other marketing and business decisions to be made in a timely fashion.
Maybe you have a different method, and if so, please share it.