Farm Horizons, February 2009
Flex rent agreements should be considered
A recent ruling by the FSA will now allow us to utilize flex rent agreements. In the past, flex rent agreements were difficult to use, because FSA considered them as shared lease agreements and thus would require the government payments to be divided at the same ratio between the landowner and the operator. Because of all the extra paperwork involved, flex rent agreements were avoided. Now, FSA will accept flex rent agreements as cash rents, so the option needs to be explored.
A flexible cash rental agreement is based on either price, yield, or revenue. In using either of these options, a base rent is established and then you have several options from there. Some of the examples then use a formula to determine the actual rent paid.
Example: Flexed cash rent = base rent x (current year’s yield/base yield) or $125 x (180/150) = $150
You could substitute price for yield in the above yield formula.
The disadvantage of either of these options is that in a year with a high yield and low price, the operator is at a disadvantage, while the same is true in a year with a high price and low yield for a formula based on price.
So, a combination of price and yield to determine revenue and then determine a flexible rental agreement is going to be more fair to both parties.
Any price or revenue formula should use an average harvest price for the grain value. The reasoning behind this is that the landowner contributes the land upon which to produce the crop, and once the crop is harvested the land owner’s contribution ceases.
Any gain in grain value at this point is due to the value gained in storage and the operator’s skills in marketing. The average harvest price should be over a given time period, such as Sept. 15 to Dec. 1 at a specific location.
A simpler option would be to use the harvest price average for CRC or RA crop insurance policies. The downside to using the crop insurance values is that this a national average instead of a local average, so there would be a difference in basis.
The fall CRC price is determined by the October average of the December corn contract, while the RA price is determined by the November average of the December corn contract. The same is true for soybeans, except that the November bean contract is used.
Some other examples would be to pay a percentage of gross revenue, or to use a fixed yield times an average market price, or to simply pay a set price per bushel, such as a $1 per bushel.
A base rent plus a bonus would be another possibility. This type of agreement is based upon a typical yield and price, and then a bonus or penalty depending on actual revenue.
The important part is to understand that the rent may be higher in a good year, but lower in a poor year. Both parties have some risk.
For example, if you agree that your base rent of $150 is based on 40-bushel soybeans at $8, and that for every $30 above the $320 revenue you would pay an additional $5.
The opposite would also be true. If revenue is $30 below the $320 base revenue, then you would deduct $5. You must understand that the $150 base rent is not a minimum.
There are many ways that you could arrive at a flexible rent agreement. The important thing to remember is that it must be in writing.
Not all land owners will be interested in such an agreement, but it may be worth exploring with a land owner that you have a good line of communication established with, and is willing to accept some risk while at the same time wishes to see you succeed.
Develop an agreement that you are comfortable with and discuss it with your landlord. It may take a little negotiation, but could be beneficial to both parties.