Run Cash Bonus Leasing Agreements Past Your Landowners

Run Cash Bonus Leasing Agreements Past Your Landowners

Now more than ever, this may be the time for bonus leases or flexible cash leases.

The lease for farm ground Howard Doster likes best, and has promoted for many years, is a flexible cash lease that accounts for variation in yield, price or both during the year. It passes some risk onto landowners, but also allows landowners to participate if things turn out well. Doster is a former ag economics professor at Purdue University. He's now retired and working with clients on an independent basis.

Doster may have been ahead of his time. The questions many tenants are asking this fall, after they find out their landowners ask for more rent, is what alternatives do they have to straight cash rent. Some know flexible leases are out there, but aren't familiar with how they work, because they haven't tried them in the past. While most aren't complicated, they may be more complicated compared to just writing a check for cash rent. Yet just writing a check or two checks, one in fall and one in spring for a price determined in November the year before, may not be as fair to one party or the other, depending upon how yields and prices fared in the meantime.

What makes the request for higher rent hard to swallow this year in many parts of Indiana and Illinois is that crops performed well below average. In some cases yields were downright awful. And although commodity prices are strong, they're not as attractive as they were six weeks ago. Yet input prices are still high, at or near record highs for most inputs. And on top of all that, many farmers are spending up to $46 per acre to dry corn this year. Last year most spent very little or nothing because corn came out of the field dry.

University of Illinois ag economist Gary Schnikey proposes a minimum base cash rent, with a bonus clause if revenue exceeds a predetermined target. In effect, if the crop revenue meets or beats the target, the landowner gets a higher rent. Del Unger, Terre Haute, and his family, have used a similar system with many of their landowners for years. They explained the system at the Indiana Farm Management Tour when it visited their farm in June.

FSA regards this lease as cash rent if the base cash rent is meaningful, and not unreasonably low, Schnitkey says.

Suppose the base cash rent is $200 per acre for good ground in central Illinois. A bonus can be added based on crop revenue above a target amount agreed to by both parties. The ag economist suggests arriving at a base figure for rent, then agreeing on what percentage of anything over a set cash crop revenue, also agreed to in advance, will go to the landowner.

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