Commentary: If You Haven’t Evaluated Your Lease in the Last 5 Years, It’s a Good Time To Do So..

By Elizabeth Strom, Vice President

Evaluating leasing options is an important part of managing your farmland asset. Crop prices, yield expectations and input prices have dramatically changed over the past few years. As we see changes in agriculture, we encourage everyone to do an evaluation on their leasing options. There is no right or wrong lease for a farm.

When we help our clients evaluate farm leases, we not only take in to account the economics, but also the goals and objectives of the landowner. It is always important to also include a CPA in the conversation because some leases come with tax advantages over others. Depending on a person’s situation, this can impact the lease type that they decide to choose.

Different lease types also include different levels of risk; we have the discussion with each landowner on their ability and willingness to bear risk of the market and crop yields. Every land owner is different in how much risk they’re willing to take.

In recent years, crop prices have increased, as a result cash rents have followed commodity prices and the price of land. However, it is also important to not miss the whole picture. Input prices have increased exponentially as well, which is very important to understand when renegotiating a lease.

Not sure how to set a rent? If you’re not sure what your farm should be renting for or what a fair rent would be, it may be time to thoroughly

research your farm’s soil types, yield history, and area land sales. These are the kinds of things our farm management team takes into consideration when negotiating leases.

A leasing option we commonly use is a flexible lease arrangement. This leasing option has become relatively common and allows for the chance of higher income to the landowner. This includes a base rent that is at a lower level and a bonus (flex) rent if crop prices and/or yields are high enough for an extra payment later in the year. This can benefit both parties as the market and yields ebb, and flow.

We never know what the markets or yields are going to be for the year when we sign the lease prior to planting. Adding a bonus or flex rent clause to a lease can allow a landowner to benefit when the market is up, which is something that you can’t take advantage of when you simply have a cash rent lease.

Feel free to reach out to us to have a conversation about reaching your goals and objectives on your farm.