Iowa farmers, landowners turning to flexible lease agreements

With land that partially floods some years reducing yields and income, David Guthrie was ready to try a different approach to leasing 250 acres of land he farms north of Monticello.

Flexible lease agreements serve farmland owners and tenants by sharing the risk and the reward. The final rent payment, which is not determined until after the crop is harvested, is based on actual prices and yields for each year.

A 2012 survey of farmland owners in Iowa indicated that 16 percent of the cropland that's cash rented used some sort of flexible or variable lease arrangements.

"We started about four years ago when corn began getting a little more expensive," Guthrie said. "The owner thought the land was worth more money for rent.

"I have some variable ground that can get kind of wet, so if I don't get a lot of yield it's really a fair way of doing it."

Over the past few years, most of the production and crop price risks have been transferred from the landowner to the tenant operator of a cash-rented farm. Since 2010, Iowa cash rental rates have increased by nearly 47 percent.

The statewide average cash rent is estimated at $270 per acre, with even higher rates for more productive farmland.

Landowners who agree to a flexible farm lease usually receive a guaranteed base cash rent amount. They also get a flex payment triggered by higher gross revenue.

Guthrie said his flexible lease is based on the cash price of c0rn at the elevator in Monticello, which rises or falls in increments. When it reaches a preset "trigger" price used to calculate his base rent payment, it's time to sell.

"You have commit to sell your corn at that price to lock it in because that's what you're going to pay for base rent," Guthrie said. "If the cash price drops after that time, you will still have to pay the higher amount."

Steve Johnson, farm management specialist with Iowa State University Extension, said the challenge is determining a base rent amount, maximum cash rent and a way to determine a flexible payment that both parties can understand and  consider fair.

"The lease agreement needs to establish how the farm's actual yield (dry weight for corn adjusted to 15 percent moisture) is determined," Johnson said. "It might require grain bin measurements, scale tickets, settlement sheets, yield monitor data, grain cart scales or other verifiable methods."

Johnson said a simpler method would involve giving the landlord a copy of the farm's proven yield for actual production history by Dec. 1. The actual production history is provided annually for crop insurance purposes.

Johnson said the lease needs to include how the flexible lease triggers are determined. If crop production costs appear too high or too low annually, changes can be made to the base rent, maximum rent, and the flexible cash lease triggers to  more accurately reflect the cost of production.

Johnson said an ISU Extension publication, "Estimated Costs of Crop Production" can be used to set an estimate for cost of production. The annual publication will be released in early 2014.

Bob Regenwether of Farmers National Co. in Hudson said the biggest trouble he's had convincing clients to adopt a flexible lease arrangement involves their giving up a little income potential.

"There are probably farmers who are willing to pay them more with a flat rent payment and they don't have to mess with a bonus payment," Regenwether said. "Once I get a farmer and a landowner to agree to it, they find it's really a nice arrangement. If you have a good year, both parties really benefit.

"I particularly like them for farms where there's a yield risk such as potential flooding. I can understand farmers not wanting to pay a high rent in that situation, but you can still have really good years on those kinds of farms."