Flexible Cash Rents Becoming Common
I know that some farmers have spent the better part of 2008 working on trying to get some of their fixed cash rent acres converted to flexible cash rent acres. And, fortunately, many landowners are open and receptive to the idea. The move to flexible cash rents is gaining momentum not just in my neighborhood, but across the Midwest as operators look for ways to stop the flow of red ink in the coming year. Ohio State University Extension has been providing flexible cash rent resources to farmers for years. Specifically, the OSU Factsheet written by Robert Fleming (retired) and Don Breece provide much of the framework for establishing flexible cash rents (http://ohioline.osu.edu/fr-fact/0002.html).
On the other side of the negotiating table, landowners, seeing higher profitability in commodity crops, are seeking higher cash rents. So, just what is that “most equitable” cash rent amount and how can it be maintained from year to year or contract to contract? One answer is negotiating a flexible cash lease arrangement that varies from year to year based on price or yield or a combination of the two. Price and yield deviations from an agreed upon starting point (base rent) will trigger additional rent in the case of higher prices or yields or possibly lower rent in the case of price or yield shortfalls.
One of the most comprehensive and current articles I have seen on flexible cash rents was written by the Ag Decision Maker team of Edwards and Johanns. Their article “Flexible Farm Lease Arrangements” was written in August of this year and provides some excellent examples of flexible cash rents (http://www.extension.iastate.edu/agdm/wholefarm/html/c2-21.html). The examples are Iowa-based, but they can provide the groundwork for you to establish a flexible rent in Ohio. Edwards and Johanns point to three benefits of utilizing flexibility in a cash rent. The most important benefit, in my opinion, is that risks are shared between the owner and the operator similar to a crop share arrangement. But unlike the crop share arrangement owners are paid in cash, they do not have to be involved in decisions about crop selection, fertility inputs, grain marketing, etc.
About a year ago there were several questions that were brought up regarding government payments under a flexible cash lease arrangement. The Farm Service Agency specifies that certain flexible cash lease arrangements are in fact “crop share leases” and certain government payments (direct and counter-cyclical payments) will be divided up between tenant and landowner according to the risk each bears in the production of crops on the leased parcel. To comply with FSA guidelines tenants and landowners need to do one of two things. First, landowners need to provide a copy of the flexible cash lease to their county FSA office, and request approval for the proposed sharing of the direct and counter cyclical payments. Second, they need to structure the flexible cash lease so that it is defined as a cash lease arrangement under FSA Guidelines. See the below example for clarification.
Example: A lease states, “The annual rental payment is $150 per acre, but in the event that average corn yield for the county exceeds 170 bushels and/or the average cash price at the local elevator for the months of September, October, and November exceeds $3 per bushel, the rent per acre shall be $175 per acre.” This lease would be considered a cash lease because the bonus payment is not tied to a specific yield on the farm nor the price received for that specific production. In cash-lease situations, the tenant is eligible to receive 100 percent of government payments for the applicable farm, provided all other program eligibility requirements are met.
For more information on flexible cash leases, please visit the April, 2008 issue of the Ohio Ag Manager website at http://ohioagmanager.osu.edu/news/archive/2008/04-08.php.