One of the most interesting changes I’ve seen since I’ve been involved with Illinois and Indiana farmland involves the farm lease. Thirty years ago, the vast majority of the farm rental arrangements were based upon a sharing of the crop and the crop expenses. Fifteen years ago, the cash rent lease became more prevalent, as farmers were willing to assume more risk in their operations. This type of agreement appealed to many absentee investors as they no longer had to write checks for crop expenses or worry about marketing their grain, plus they knew exactly how much they were to receive each year.
The volatility we’ve seen in the grain markets the past 3 years is creating the need for another type of lease – the flex lease. This lease type is not new – there have been variations of it around for several years. Essentially the flex lease tries to incorporate the aspect of the cash lease that landlords found appealing (no expense checks to write and a guaranteed payment amount) with the revenue sharing aspect of the crop share lease (when grain prices go up or when yields are exceptional, the rent can go up). All this is accomplished by setting a floor rent that the farmer is willing to pay for the land, and then incorporating a formula that calculates a bonus based upon crop prices, actual yields, or both. Sometimes the formula is simple, and sometimes it’s quite complex. A recent article (Creating A Flexible Farm Cash Rent Lease) written by two Kansas State University Agricultural professors details the process that many farmers and investors are going through to try and establish an agreement that is fair, given the changing conditions in farming.
I’m confident that in the not too distant future we will see leases for farmland properties evolving again. If you have any thoughts regarding this issue, please email them to loranda@loranda.com
