Cash leases can help both parties
Landowners and their tenants both want to make a profit. For farmers like Tom and Lori Pfeifer of Madison, profitability depends on many variables, including cash rental rates.
With the prices of cash leases for farmland rising rapidly, young farmers often have difficulty competing for rented ground, says Tim Lemmons, University of Nebraska-Lincoln Extension educator at the UNL Northeast Research and Extension Center. But there are ways for tenants and landowners to vary cash leases to the benefit of both parties.
“The highest-paying renter is not always the best renter,” Lemmons says. “They might not treat your ground in the best way.”
At a glance
• Flexible cash leases provide benefits for owner and tenant.
• They can serve as a way to share more of the risks.
• The highest-paying renter is not always the best renter.
With the 2008 Farm Bill provisions allowing for more flexibility in cash rental agreements, landowners should look at potential variables within their lease contracts that offer incentives to tenants to raise the average production history of the land and to spread out the risk, he says. “Start slow. Your appetite for risk depends on where you sit.”
“Flexible cash rent might be a way for fathers and sons who farm together to carry some of the risk in handing the farm over to the next generation,” Tom Pfeifer says, “if they are maybe going to retire sooner than they thought, but they didn’t want to get away from farming immediately.”
“I think there are landowners out there that are seeking people to do the best for their land and not necessarily their pocket,” Lori says. “I think young people need to prove themselves as knowledgeable farmers, and that will take them a long way.”
Providing opportunity for additional rental income for the landowner gives them an incentive to consider taking on more of the risk. “There is incentive to the tenant to produce wealth,” says Lemmons. “And this plays into the goals of the landowner to increase APH.”
When one spouse of a farming couple passes away or gets sick, the new technology in agriculture today can be hard to understand for the other spouse, Tom says. “If they rent it to a friend or neighbor they have seen in town or at a local store, it may be easier to sit down and talk to them about the things that have changed and what may be coming in the future,” he says. “A stranger may come in and take advantage of a delicate situation.”
Lemmons suggests setting a base rental rate first, negotiated by the landowner and tenant according to the local rental markets. Then a floor and ceiling rental rate can be established. The landowner will never receive less than a floor amount, and the tenant will never pay more than a ceiling amount. This rental variance might be $10 to $25 per acre, Lemmons says, “but depends ultimately on the risk appetite of both parties involved.”
Adjustments up or down within the range can be made based on variables, including final yield, crop prices, cash farm income, a price index or a percentage of bushels produced.
Lemmons says that landowners can use flexibility in their cash leases to receive bonus rents in bumper years. “Don’t get greedy,” he says. “Set realistic minimum and maximum yields.” Landowners will have some downside potential, so they will want to cover their minimum ownership costs.
For tenants, these flexible leases help manage downside risk by offsetting loss to the landowner.
“Manage upside potential through superior agronomic and business skill,” Lemmons suggests. “Make money through effective negotiations,” keeping maximums and minimums low and trading services for cash.
“The landowner has a value, not just land to be rented and forgotten,” says Tom.
He suggests that tenants need to be available and honest with their landowners. The keys for successful tenants are “being able to answer questions and understand the wants and needs for now and the future,” he says. “Show them with hard records what you propose to do with their land and in the years to follow.”
This article published in the May, 2010 edition of NEBRASKA FARMER.