LEASE TERMS
Most experts agree that cash rents and rental terms in general will increase over the next few years. Many leases for 2007 were already negotiated before the recent run-up in commodity prices. At our fall meeting, our farm managers felt that small increases were to be expected. One question I’ve been asked recently is “what will happen to the large increase in revenue per acre due to higher commodity prices?” If the current commodity prices are sustained and farm operators continue to have average to above average yields there could be another $50 - $100 per acre in additional revenue. Some of that should and will be paid to the landowner. Of course, farm operators want to feel comfortable that these prices will be sustained and are not a blip like the spring of 1996 in making the commitment to higher rental terms.
Our challenge is determining how much is fair and in what fashion can it best be captured. Is the best mechanism cash rent or share lease? To that end we felt that considering (and, if appropriate, recommending) a switch to a cash-flex lease could have tremendous advantages to our clients in this rapidly changing marketplace.
A cash flex lease provides you the landowner a base rent per acre. If a crop year happens to be very successful in terms of price and yield, then the landowner receives a bonus payment. As we look forward, there are many unknowns about commodity prices. If what Dr. Chris Hurt, Ag Economist from Purdue University, believes is true and we move into a market where corn prices remain above $3.00/bushel, then bonus payments could become the norm. Regardless of the way prices move, this allows you as a landowner the upside opportunity while insuring your base rent per acre.
If you have an interest in a cash flex lease, please contact your area representative for more details on how one might work for you.
Howard Halderman, President
Halderman Farm Management Service, Inc.