Around this time of year, lease discussions typically begin picking up steam. For one, this is the time of year where landowners who may be looking to sell before next spring need to formally terminate their tenant for that following crop year. (For more details on this topic, read our recent blog post The Necessity of Terminating a Farm Lease). To a lesser extent, tenants and landlords will begin discussing modifications, extensions, etc. to their current leases.
A recent article in DTN/Progressive Farmer (Cash Rent Hangover -1) takes a look at how some of the high-dollar, multi-year cash rent contracts that were locked up in late-2007/early-2008 and are now expiring will possibly be modified as tenants and landlords look to 2011. I think most would agree that we are in a different market today, than we were in the summer of 2008. The commodities markets have come down (although we have seen a recent rebound) and input costs have also been lowered. Even with lowered in put costs, the risk for operators has still been ratcheted up over the last 5-10 years. The author discussed this with University of Illinois economist, who estimated that the cost on a typical Midwest farmer to plant a corn crop has increased by over 50% since 2006.
One possible idea that has been gaining traction the last few years is the flex lease. A concept that has been used for decades in some variation or another, a flex lease sets a floor cash rent payment that the tenant will pay. The balance of the rent is essentially a shared lease where the tenant and landlord share in both the good and bad years.
As we come off of some of the high-dollar contracts that we saw a few years ago, communication between tenants and landlords will be key for both parties to benefit. How have your leases changed over the last few years? What modifications are being made for 2011?
Tags: agriculture, Farmland Real Estate, lease, Loranda Group
