Recently we reported that ag economists at the University of Illinois were promoting flexible cash leases as an alternative to higher cash rent for landowners who felt they needed a bigger piece of the pie in 2012. Flexible leases aren't new, but haven't been widely adapted in many areas in the past.
Now comes word that one Indiana farmer who was trying to keep land but who couldn't afford the rent the tenant wanted was able to work out a flex lease. The terms are known only to him and the landowner.
Here's how it works. The tenant offers a base cash rent price. Even that is negotiable, and the landowner may insist on a higher base price than what you originally offer if you're the tenant. Flexible leases don't remove the need for practicing the art of negotiation. They simply shift the potential risks of yield, weather and price, depending upon how they're set up.
On top of the base rent, the landowner will receive additional compensation. That may be on price, as set out in the contract to be determined at a mutually agreeable time. It might be the average price at four times of the year, four specific dates, at an elevator mutually agreeable to both. Or it might be based off the Chicago Board of Trade price. How you do it is not as important as you both agree on a method that is fair, and will shift some of the price risk and opportunity to the landowner instead of leaving all the risk on the tenant.
You can construct flexible leases for renting land based on yield in the same way. You may want to use county average yield, or perhaps a share of the crop above a certain yield point. If the yield doesn't equal that point, the landowner doesn't get any additional payment based upon yield. This can help take out a lot of risk introduced by weather on yield potential.
The lease could also be set up so that the landowner gets a certain percent of net profit after expenses are paid. Or the lease could include input process as well. The bottom line, most experts say, is that any type of flexible lease that allows both parties to share in risk and opportunity will work, as long as both parties agree to it.