Deciding on cash rent and crop share leases
Over past years we have seen an increase in the number of cash rent leases and a reduction of crop share leases. Cash rent leases (where the tenant pays a specified amount to the landlord) now represent 50 percent of all leases in Illinois. The remaining leases are crop share leases (where landlord and tenant split both the crop income and major expenses) and the flexible cash lease.
There are positive and negative points to both leases, as you would expect. Many cash leases are entered into because the owner does not want the chore of marketing grain or paying for crop expenses. Tenants sometimes prefer the ease of cash rents because decision making is much easier. However, if one compared the amount of potential income for landlords, in many cases, the crop share arrangement can provide more revenue, especially in years of good crop yields and high prices. However, it all depends. The key factors would be grain yields/ prices and cash rental rates.
In years in which the grain yield is short, prices are poor, or the rent is high, the tenant can come out on the short end of the cash lease. The cash rent amount was determined long before the combine pulled into the field, and very few cash leases contain a clause that can adjust the lease based upon yield and/or price. However, flexible (adjustable) rent offers both tenants and landlords significant opportunities to safeguard income and protect against loss.
A flex rent can vary the rental price due to crop price and/or crop yield. A basic flex rent might set a base rent, a base yield and a base crop price. Then depending upon how the crop yielded or how prices react, the rent can flex. So if good crops and higher prices are seen, the landlord can gain income.
Conversely, if poor crops or prices prevail, then the tenant is somewhat protected. There are sometimes floors or ceilings placed so that the flex has somewhat limited swings, but this type of rent can reward during the good times and protect during the poor times.
Up until three years ago, the University of Illinois Farm Business Farm Management service would glean cash rent information from record books. They no longer do since the USDA began a phone survey asking producers that same question. They post those averages in November, and that information is available online at HYPERLINK "http://farmdoc.illinois.edu/manage/cash_rent_Illinois.pdf" http://farmdoc.illinois.edu/manage/cash_rent_Illinois.pdf. Keep in mind those figures come from phone surveys, and there is no way to determine accuracy. However, it is a good starting point. Remember that these are averages. Many factors can determine a rent, including: land productivity, supply/demand, aggressive tenants, aggressive landlords, etc.
Each tenant/landlord relationship should be entered into with a full amount of trust between parties. Landlords need to know their tenants and know how their operations perform. In my opinion, the long term goal of landlords and tenants should be to pass the land on in better shape than when they began the relationship. To do that, both parties have to know and trust each other. Neither party should enter into an agreement with the only outlook being financial gain. I know it is easy to consider cash income only, but the land will survive long after the relationship vanishes. Leases should favor no party over the other. These relationships rely upon effective communications and there must be regular opportunities for trust and open lines of communication for the relationship to be successful. In other words, effective relationships go beyond the paper that the parties sign.
Lastly, make sure the lease is written down. It is much easier to determine who does what if it is in writing. University of Illinois Extension has cash and crop share lease forms, or you can find them online at HYPERLINK "http://farmdoc.illinois.edu/manage/index.asp"