Is a flexible farm land rent arrangement in your portfolio?

Landowners and tenants are looking to updating their land rental arrangements and rental rates to reflect the volatile commodity markets.

As the 2013 crop harvest is wrapping up, farm producers and landowners are turning their focus to putting things in place for the 2014 crop season. One of the first tasks will be renewing or updating their farm land rental agreements.

Over the past few months, there have been major changes in commodity prices; both in their sale price and their input cost. Leading the talk at the local coffee shop is the drop in corn prices which are more than 30 percent lower than this time last year. When crop prices drop, tenants/renters need to review how to make adjustments in the largest expenses found in their farm’s budget like the cost of land rent. Over the past several years, we have watched land rent make major double digit increases each year. These increases in farm land rents were driven by high commodity prices which provided positive profit margins which in turn were passed on to the landowners in the form of higher land rental rates.

The real challenge now is to make the needed adjustments to land rental rates to reflect the value of current commodity prices which in some cases may require a reduction in farm land rents for 2014. This is no easy task. No landowner is receptive to being asked to accept a lower rental payment for next year but in some cases it will be necessary for those that have been receiving top rental rates.

Many landowners and tenants/renters are now looking to use a farm land rental agreement that has options to allow the base rent to adjust higher in years where the economic conditions allow extra rent to be paid. The overall use of a flexible or indexed land rental agreement is increasing slowly as more farms have the technology to track yields on a field by field basis from the seat of their combine. You can find some resources and links at the Michigan State University Extension FIRM webpage. Having access to a farm’s actual production records can allow the use of an economic formula to identify if and when the land rental agreement would generate a bonus payment (payment over the base cash rental rate in the agreement) to the landlord. This type of flexible land rental agreement requires more direct communications, the sharing of both production data and the working knowledge of the farm’s current economics, between the landlord and the tenant/renter to make this a win-win situation.

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