Flexible rental agreements are best for farmers and landlords
ST. PAUL, Minn. (6/29/2009) -- Rental rates have reached record levels in 2009. Record farm prices last year, high farmer incomes and continued increases in land values have all pushed up cropland rental rates. Farmland values have declined since 2008 record levels. The problem with these high rental rates is many were set last year when commodity prices were much higher.
Each year I complete crop budgets for corn and soybeans and then insert these numbers into two worksheets. The first is an "Acceptable Price Worksheet," which determines an individual farmer's breakeven market prices necessary to cover all expenses and family living costs. Looking at 2009, these breakeven prices are from $4.25 to $4.50 for corn and $9.20 to $9.60 for soybeans. These prices are currently not available for either crop. The second worksheet is titled "Operator's Cash Rent Worksheet." Using current 2009 harvest prices of $3.50 for corn and $7.50 to $8.00 for soybeans, the worksheet determined rental rates from $69 to $115 per acre at 165 bushels of corn and 48 bushels of soybeans per acre.
These rental rates are very low compared with current rental agreements. If prices or yields do not improve by harvest farmers will lose money. A better option for rental agreement would be a flexible rental agreement. This is where the farmer and the landlord share the risks of farming and both will benefit when there are good yields and prices. These agreements usually contain a base rent which can be set low enough that a farmer will not lose money when carrying good levels of crop insurance.
There are many types of flexible rental agreements. Iowa State's Ag Decision Maker File C2-22 found at www.extension.iastate.edu/agdm lists several types of flexible rental agreements, some based on gross revenue, base rent plus a bonus, rent based on yield only, rent based on price only, and profit sharing flexible rent agreements. If you complete a flexible rental agreement with a base cash rent with added payments it will be considered a cash rental agreement with Farm Service Agency in the latest farm bill. But without this base rent you will be share cropping with your landlord who will deserve a portion of the government program payments.
Iowa State has a second publication File C2-21 "Flexible Farm Lease Agreements" which includes an example of a Flexible Cash Rent Agreement. This publication states that nearly 12 percent of all Iowa farm leases were flexible leases. Leases in which the landlord would get more than one-third of the crop would also put the farmer at risk of losing money.
I encourage every farmer to complete the two worksheets to determine breakeven prices and where should cash rents be today. They can be found in my 2009 Farm Resource Guide. If you would like a copy for $25 plus tax and postage, send an email to email@example.com or call (507) 372-3906 and leave a message.
If the current corn and soybean prices remain constant throughout year, these prices will not provide profits for farmers in 2009 unless yields are above normal. Farmers and landlord need to negotiate fair rental agreements that will allow both parties a reasonable income and share the risk if prices and/or yields are poor but also share the benefits when prices and/or yields are good.
David Bau is an ag business management educator with University of Minnesota Extension.