Flexible Crop Cash Rents

4) Adjust rents for yield only 

This approach transfers some of the yield risk to the owner, but leaves the tenant with the price risk. This approach might be particularly useful in the present day where it is difficult to determine a true price since total returns are impacted by governmental loan deficiency payments, loan rates, marketing gains and price disaster payments. This method requires establishing a base rent and a base yield and adjusting the payment by the actual yield. Example: Assume a base yield is established at 47 bushel of soybeans with a $100 base rent, if the actual yield is 42 bushels or 52 bushels per acre the rent would be adjusted accordingly. The rent would be 42/47 or 89.36 percent of $100 or $89.36 per acre if the yield were 42 bushel per acre. It would be 52/47 or 110.63% of $100 or $110.63 if the soybeans yielded 52 bushel per acre. A similar formula would be set up for all other crops on the farm.

5) Adjusting rents for price and yield

This approach allocates price and yield risk between landowner and tenant. It is perhaps the most comprehensive approach discussed.   A base rent is established that is later adjusted for price and yield. Example: If the agreed base rent is $100, base yield for corn is 150 bushel, and price is $2.00 per bushel, the following calculations would be made to determine the actual rent paid. Use the actual price and yield as the numerator of the fraction and the agreed price and yield as the denominator of the fraction multiplied by the base rent to determine the rent. If the actual yield was 160 bushel and the actual price was $1.90, the formula would calculate the rents of $101.33 ($100 x 160/150 x $1.90/$2.00= $100 x 106.66% x 95% = $101.33).

Typically 50% of cropland rents are paid in the spring and 50% in the fall. This practice could continue with ½ of the base rent paid in the spring and the remaining adjusted amount paid in the fall.

A minimum and a maximum rental rate could be established on any type of flexible cash rent. It could be agreed that in no case would the rent paid be less than $75 nor more than $125 per acre.

Tenant and landowner should negotiate realistic terms that fit the property and finances of both parties. Before agreeing to any flexible arrangement, figure various scenarios of price and yield to determine if you can live with the agreement if prices or yields are high or low. Particular attention should be given as to how and when prices will be determined. Will you use a straight cash price on a given day at a specific elevator or will you use the average of several dates or use futures prices adjusted by basis or forward contract bids to determine a fair price? If yield is a factor in your flexible rental arrangement, how will it be determined, by over the scale measurement, yield monitor or bin estimation?

Once the tenant and landowner agree on a flexible cash rent plan, the next step is to put it in writing. Lay out the terms and conditions on paper and both sign it. Both should retain copies.

Examples:

Here are further examples of how the five types of variable cash rent formulas would be calculated for soybeans. Example: The agreed upon base yield is 40 bushels/acre, the base price is $5.00 per bushel and the base rent is $90.00 per acre. Actual yields were 50 bushel and the price was $4.50 per bushel.

Return to the Farm Management Page
Return to the SWROC Home Page

This page was created on 9/28/01 by Erlin Weness with assistance from M. Werner.