Fast Facts

Energy Markets

October, 2008

Leasing Considerations For A Volatile Year
Landowners and tenants will face a difficult challenge in determining a fair and reasonable leasing agreement for both parties for 2009, says Bruce Johnson, a University of Nebraska-Lincoln (UNL) agricultural economist.

When it comes to farm leases, Johnson says both the tenant and landowner need to realize that risk exposure going into 2009 is greater than ever before. With a cash lease, the tenant carries the bulk of the risk, and the landowner must realize this risk is growing.

“Tenants can't simply continue to bid up cash rents in light of the fact that there is serious risk exposure on both the purchased-input side and the commodity-price side,” says Johnson. He adds that the best advice may be to leave 2009 cash rent rates at 2008 rates, assuming those 2008 rates were set at reasonable and competitive levels for the local area.

When one loads current conditions into the UNL Farm Lease Calculator, the results would suggest little economic justification for raising 2009 lease rates much above the 2008 levels. The UNL Farm Lease Calculator and other leasing resources are available on the Department of Agricultural Economics Web site at: www.agecon.unl.edu.

During volatile market times, the crop-share lease actually is the most fair and equitable of the cropland leasing agreements, says Johnson. Both tenants and landowners have tended to move toward cash leasing and away from crop-share leasing – tenants because of the great management flexibility and landowners because of the fixed cash payment they can count on with little management responsibility on their party.

“However, as we try to ride out this global economic storm, it may be time for both parties to reconsider leasing on a crop-share basis,” he says. “Bear in mind, though, that traditional crop-share arrangements may not fit the type of crop-production agriculture we have today.”

For example, under the conventional 50-50 crop share arrangement for irrigated land, the landowner's relative dollar contribution to the contract is often greater than that of the tenants. However, by altering the proportional shares of one or more of the variable inputs instead of sharing in the same proportions as output, the balance can often be restored. Again, the UNL Farm Lease Calculator can help with this.

“Finally, it should go without saying that economic decisions today based on mutual trust, forthrightness and integrity are more important than ever,” he says. “All parties need to be striving for one common cause – a fair and equitable leasing arrangement with the long-run sustainability of the land and the agricultural community in mind.”

For more information on farm lease agreements, click here: cornandsoybeandigest.com/ag-issues/leasing_logistics_nebraska_0908/ or here: www.agecon.unl.edu/realestate.html.
Source: University of Nebraska Institute of Agriculture and Natural Resources

Good News On Flex Leases
All flexible cash leases for land rental contracts will now be considered cash leases by FSA for farm program payment determination during the 2009-2012 crop years, according to preliminary revised regulations announced recently by USDA. The revised regulations state that any rental contract with a guarantee plus a bonus will be considered a cash lease, regardless of how that bonus is set up or structured.

Previously, FSA considered any flexible cash lease that was based on actual farm yields, prices or revenues to be a share rent lease. That meant that eligible landlords had to receive a portion of all farm program payments. This requirement was restricting the use of flexible leases in many situations, even though current crop economics strongly favor the use of flexible leases for the 2009 crop year and beyond. Farm operators and landlords should continue to use caution with 2009 land rental contracts that involve flexible cash leases, until USDA releases the final regulations on flexible leases in a month or so.

To read a related article about USDA regulations on flex leases from Iowa State University, click here: www.calt.iastate.edu/cashlease.html.

To read more articles from Kent Thiesse, click here: cornandsoybeandigest.com/kentthiesse/.

Ag Update PDF - Energy Markets 2008
Ag Update PDF - Management October 2008
Ag Update PDF - Crops September 2008