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Flexible Cash Farm Lease

ISU Extension Farm Management Specialist, Steve Johnson, discusses flexible cash farm leases with Successful Farming Business Editor, Dan Looker.

Tue, 31 Jul 2012|

-Hello. I'm Dan Looker, business editor with Successful-Farming Magazine. And with you today is Steven Johnson, Iowa State University Extension Farm Business Management specialist. And we're going to be talking about one of the most important input cost every farmer has which is the cost of their land, their cash rent or what for most people has cash rent these days. We'll be talking about ways that flex rent may help alleviate some of your risk for farmland cost. Steve, maybe we can go over some of the background on this-- of the land values, of course, have been skyrocketing in the last few years. -Sure. -And as I understand it, when you talk to landowners. They're very interested in getting a little better share of all of this-- -Sure. What you're gonna see in front of you is a line graph and on the left-hand side is the Iowa Average Land Values. And on the right-hand side is the average cash rental rate. Iowa State does their land value survey every November and releases them in December. And we do our cash rent survey in March and release in May. And I think what you begin to see especially since 2006 is cash rents I the state of Iowa are following land values higher. Now, we haven't done or land value survey for 12, but we know the average cash rent in the state as of 2012 is $252 per acre. That tends to be a fixed lease. And so, the idea that is truly a reflection of market values. We don't tell operators what to bid or we don't tell the landlords want to receive. But we do an extensive survey every March with over 1,400 respondents. Beginning in about 2006, we started taking a look at maybe something different than a fixed. We called it a flex release. And we drew the numbers from a couple of different places, but most importantly, we looked at cash rent. The average cash rent in the state as a percent of the gross crop income. In other words, yield x price. And with soybeans on the top and corn on the bottom, we found that from 2002 to 2006, the average, all right-- was roughly 49 percent of soybean gross crop income was reflected as a cash rental rate. And in for corn probably closer to 34 percent. But since 2006, we've seen land values explode. And so the landowner was getting more on the appreciation side and actually less on a cash rental side. -Right. And it has smaller share of that higher value of the land. -Yeah. So, that mean, it's actually dropped but the landlords benefiting from the appreciation. Now, somewhere a blend between if you would that mean of 35 percent of soybeans and 24 percent of corn is our bonus. So, what we've got to do is to establish a base rent and the bonus. What we're using in these Iowa flex leases is roughly 33 percent of the net is the bonus as a part of the flexible cash leases in Iowa are real time cash lease. It reflects the yields x the price of the farm. Now, we've got a case study farm that we've been following now and this is our 5th year. And in this example, we created $250 an acre based about roughly the average cash rent. -Okay. -And then we looked at what the total gross crop income minus the total expenses would be and we pay 33 percent as the bonus. So, what you're looking at in 2008, there would have been a nice bonus in addition to the base rent. So, the landlord of this farm was 50 percent and 50 percent beans would have received though roughly total payment that was $286 per acre. But in '09 and '10, there was no bonus. -Right. -Why? -The import cost really rose this year. -Good. The input cost rose. And what about the total gross crop income? -Well, it was down as well. -So it wasn't any higher so there was no bonus, right? -Right. -So, if we look at the performance of these flex leases, they're u sing the actual farm yields. They're using the cash price but rather than what the operator, tenant operator solve for. What would the average cash price have been for delivery in the month of October for that farm and then four pricing periods; January 16th, April 15th, July 15th and October 15th just a simple average, yield x price. More surprising is the large bonus was the 11 crop, not really surprising good yields especially where we're following this particular example farm-- -Right. And the prices still straight high. -And high prices last-- -Yup. -And so the fact is, is that these bonuses 33 percent of net are getting paid in years that those farms tend to have good yields in access to high prices, regardless of what the tenant operator sold for. Now, we're using Iowa State Cost of Production. So it's not even depending upon what that individual tenant has for record keeping. We can actually use some sort of a number that's drawn by the University in January. And then, I think it's important to look at how this likely contract would have performed in 2012, even with a 15 percent loss in average yield, but yet a higher price especially in July and October. This farm is gonna generate a likely bonus, a $250 an acre if you would based rent, likely split, half of that before planting and the other half after harvest. But after harvest, this particular tenant also knows their yields on that farm and they know the average price. It simply what they could have got if they would have delivered. Number 2, yellow corn, number 1 yellow soybeans to dry weight to their local coop. Yield x price is reflecting. I think we've got a lease that reflects a little more risk for the landlord and a little less risk for the tenant but a bonus on those years they have good yields and high prices. -Because the tenant isn't paying as much as he or she might otherwise with a straight cash lease. -Correct. -We were talking about this earlier Steve, the average there does not reflect in the crop insurance indemnity payments for this year. -Correct. -Right. -And in these leases, I believe that you had confusion when you throw crop insurance indemnity payments, and here's why. Most farmers insure by enterprise units and they combine their cornfields, all right-- together for crop insurance purposes. Their farm-level products-- -Right. -But their cornfields combined at the county level for that particular farmer. -Which could include a number of landlords. -That's right. So what happens when this farm has a loss but that tenant farmer doesn't collect because he has combined all those cornfields or all those bean fields into enterprise units? So, I'm exempting crop insurance payments and I'm exempting direct payments thinking there won't be direct payments in these in the near future. -Right. -So, the direct payment still goes to that particular operator who's at risk on the farm. So, it is still construed a cash lease according to FSA, so there's no shared government farm program benefits. The landlord doesn't have to sign up for the traditional farm program we've been calling to direct encounter cyclical program. If there's disaster payments, the disaster payments would go to that particular operator who's in risk on the farm. The landlords taking a little more risk, all right? They can adjust that base. There's nothing magic about 250. It happens to be the average cash rent that we see in 2012. But even in the year like 2012 with the drought and we have lower yields. The higher price that was available at the local coop especially in July and October offset those lower yields and even a bonus would likely be paid. And that bonus would be paid with the second half cash rent payments due likely in that December time frame. -Sounds good. So, basically, this is a way of possibly helping the farmer avoids some risk if by not having a quiet as high-- -I think it could be a win-win. I think, maybe the farmer has a lower base so the landlords takes more risk. But I have a lot of cash rent landlords that sure would like to see the yields on their farms. The farmers gonna show them the actual yields that they use to make the calculations. The yields are the ones they use for crop insurance purposes. It's the APH data that they collect annually. -Uh-huh. -So, suddenly, that landowners aware of what kind of production there is on that farm. I think it's a win-win. Both the landlord benefits even though they get on a lower base, they possibly get a bonus and see the yields on these farms, and they begin to understand the risk that, that tenant's taking-- -Right. -In a world of high cash rents. -Good enough. Well, thanks very much Steve. I hope this is something that will be helpful to more and more people. -Thanks Dan.