By William Edwards
Iowa farms come in all sizes and shapes. Finding the right lease arrangement for each farm requires some careful thought. Fortunately Iowa land owners and operators have several common and some not so common types of leases to choose from.
Table 1 shows how the number of acres under each of the most common types of lease agreements in Iowa has changed over the last few decades. The data come from a survey on Farmland Ownership and Tenure in Iowa that is carried out every five years. New data will be available in 2018.
The proportion of acres under crop-share leases has declined from 21 to 13 percent of the total since 1982. Acres operated by the landowner declined from 55 to 40 percent over the same period. Conversely, acres under a cash rent arrangement increased from 21 to 46 percent of the total acres farmed. It should be noted, however, that the shares of the different land tenure options have been relatively stable since 2002.
The decision on what type of lease arrangement works best for individual landowners may begin with how much risk they are willing to take on. Figure 1 depicts the sharing of risk for tenants and landowners under different types of lease arrangements. A recently retired farmer who wants to stay involved in crop production may prefer a custom farming or crop- share arrangement. A landowner who has recently inherited land, however, may prefer to receive a set amount of a cash rent, with less involvement in the decisions needed for crop production and less financial risk.
Cash lease agreements are popular with landowners because they provide a fixed income, at least for the length of the contract, and require very little involvement in the management aspects of growing and marketing the crop. Many tenants prefer cash leases, as well. When a tenant is renting from multiple owners, cash rents reduce the amount of record keeping needed and let the tenant manage all the rented acres as a single unit. Grain can be commingled for purposes of storage and marketing. Some tenants feel that they can rent land based on average expected yields in the area, and if they are able to achieve superior yields they will retain all the additional income.
The primary disadvantage of a cash lease is the need to agree on a rental rate that accurately reflects the profit potential of the farm. Tenants and owners need to re-evaluate the amount of rent periodically, sometimes annually. When yields and prices are relatively stable, setting the rent may be fairly easy. However, when conditions are more volatile it becomes more difficult to determine a mutually agreeable rent.
Sharing of costs and production had been a traditional means of renting land in Iowa for over a century. Rental terms have changed very slowly, even when technology has changed the relative values of the contributions from the owner and the tenant. The most desirable feature of a crop-share lease is that both parties automatically share in increases or decreases in profits, making yearly negotiations about rental terms unnecessary. Share leases also allow young operators to benefit from the expertise of experienced landowners, and decrease the amount of operating capital the tenant has to supply by over 50 percent. If a tenant is farming enough acres to reach the limitations on USDA program payments, a share lease may prevent some payment dollars from being lost.
Whether landowners are willing to take on the added financial risk and management considerations of a crop-share lease is a very individual question. Retired operators who still want to have active involvement are good candidates for share lease agreements. In other cases, a professional farm manager may be hired to carry out the owner’s management and marketing responsibilities.
Owners or managers who wish to assume all price and production risk and be very involved in management may choose to have their land custom farmed. Tenants who custom farm often find that adding some extra land with a guaranteed return allows them to fully utilize their machinery and labor without adding financial risk.
Tenants and owners who are willing to share risk but want the simplicity of a cash lease may prefer some type of flexible cash rent agreement. Terms of a flexible lease can vary considerably, but common arrangements include calculating the rent as a percent of realized gross crop revenue, or a base rent with a bonus that depends on actual prices and yields achieved. More explanation of Flexible Farm Lease Agreements can be found in AgDM File C2-21.
Figure 2 shows how the returns to a landowner under three different types of lease agreements would have varied since 1990. The crop-share lease income is based on one-half of the revenue received from the state average yields and fall cash prices from each year, plus one-half of any USDA commodity payments and crop insurance indemnities paid each year. One-half of the estimated costs of seed, fertilizer, pesticides, crop insurance, drying and operating interest were deducted, but land ownership costs were not deducted. The land was assumed to be planted half to corn and half to soybeans.
The returns to a cash lease were the average cash rental rates for Iowa as estimated by the annual Iowa Farmland Cash Rental Rate Survey carried out by ISU Extension and Outreach. Again, no land ownership costs were deducted. The returns to a flexible cash lease assumed that the rental rate was equal to 30 percent of the gross value of the corn crop and 40 percent of the gross value of the soybean crop each year. These terms were chosen for purposes of illustration, but many other variations could be used.
Figure 3 shows the return to the tenant each year after subtracting estimated production costs and cash rent payments. The average returns from the three types of leases were nearly identical over the 27-year period, for both the owner and the tenant. However, the fixed cash lease put nearly all the income variability on the tenant’s shoulders. The crop-share lease and the flexible cash lease shared risk between the two parties, and provided more stable returns over time.