Home Farm Equipment Flexible farm lease proves to be a win-win, yet again

Flexible farm lease proves to be a win-win, yet again

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Increased commodity costs will little question place larger stress on land hire negotiations this yr. In truth, final week marked my first farm lease dialogue for the 2022 crop yr. Each the farm tenant and the landowner made legitimate factors which is able to little question be a part of many yet to be had comparable conversations.

For the farmer, though grain costs are larger, there’s much less authorities support in contrast to a yr in the past. Enter prices are already rising which is able to reduce into subsequent yr’s earnings, and there’s no assure the costs as we speak will maintain for subsequent yr. 

For the landowner, they haven’t raised hire in almost 10 years and all they’ve examine in current farm publications is file authorities support funds, traditionally excessive grain costs, and booming land public sale experiences. 

Fastened money hire lease?

The proposal on the desk was to enhance the annual fastened hire cost almost $75 per acre to match ranges the place different neighboring landowners are receiving for his or her hire. This doesn’t even consider any hire bumps they might impose on their tenants for subsequent yr. 

I used this a chance to introduce two different market components which we’ve witnessed first-hand in simply the final 12 months: market volatility and uncertainty. These aren’t any fault to nobody, and nobody can predict future value developments or how climate could impression yields. Nobody is aware of whether or not the land hire you agree upon now will be truthful for the market situations current once you harvest the crop over a yr from now.

Reply: A versatile farm lease

That is the place we’ve discovered the idea of a versatile farm lease so interesting. It could possibly ebb and movement with the volatility within the market and can facilitate a extra optimistic, long-term landlord-tenant relationship.

Associated: Considerations for flexible lease arrangements

As an alternative of a $75 per acre enhance in hire, I proposed a $25 per acre increase which we’ll name the assured base hire cost. Nonetheless, after harvest the tenant could share a share of their earnings in the event that they exceed their break-even.   

Right here is an illustration of such a lease construction the place the precise web hire will be the upper of a $250 per acre base hire or 33% of gross income:

Landowner rent with flexible lease for soybeans

Take for instance a state of affairs of 200 bushel per acre yield occasions a median of $5 per bushel. That is $1,000 of gross income occasions 33%, or an precise hire of $330 per acre. A bonus hire cost of $80 per acre will be paid over and above the bottom hire cost. Nonetheless, there would be no bonus cost due if the typical value of corn is barely $3.75 per bushel.

The dilemma with this latter state of affairs is that if they agreed to the unique fastened hire proposal of $300 per acre however don’t have the income to help it. 

In occasions of excessive costs, a flex lease is a software to maintain fastened rents cheap however nonetheless a construction to share a share of earnings with the landowner, if the earnings are there. The bottom hire is there for the producer to fall again on when value and/or yields immediately fall.

In occasions of low costs, a flex lease is a software to negotiate decrease fastened hire funds whereas exhibiting a landowner a construction the place the hire can nonetheless flex larger as value or yield flexes larger. Who is aware of, the landowner could very effectively lead to a larger hire even after agreeing to hire concessions upfront.

A versatile farm lease may very effectively be the modern-day various to a conventional crop share lease, however nonetheless with a fastened hire element. Since each events are providing some give and take, and sharing within the dangers and rewards, it tends to facilitate extra of a partnership for the farm.

Subsequent yr, I look ahead to this annual lease assembly to be a lot much less contentious. Reasonably than solely centered on the annual hire adjustment, it’s going to give attention to how the farm carried out and discussing different components which can be vital to the landowner and the tenant. 

Downey has been serving to farmers and landowners for the final 21 years with their household farm transition, leasing methods, funds, and normal land session.  He’s the co-owner of Next Gen Ag Advocates and an affiliate of Farm Financial Strategies.  Attain Mike at [email protected].

The opinions of the writer should not essentially these of Farm Futures or Farm Progress. 

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