utilizing flexible cash farm leases september 2008 steven d. johnson farm & ag business...

Utilizing Flexible Cash Farm Leases September 2008

Steven D. JohnsonFarm & Ag Business Management Specialist

Flexible Lease Objectives

Introduce the Concept behind Flexible Cash Farm Leases

Discuss the USDA Farm Service Agency’s Interpretation of Flexible Cash Leases

Demonstrate How a 2009 Flexible Cash Lease can be Analyzed

Summarize “Putting Together a 2009 Flexible Cash Lease”

Why a Flexible Cash Farm Lease?

Problem:

In Iowa, many cash farm rent leases are negotiated and renewed on or before September 1st for the following year.

Prices and yields for 2009 are very unpredictable.Crop input costs (non-land) for 2009 are expected to

increase roughly 35% over 2008 costs.

Solution: A Flexible Cash Farm Lease.

Source: ISU Extension, Aug. 2008.

Types of Flexible Leases

• Rent varies with both price and yield– Matches tenant’s ability to pay

• Rent varies with yield only– Tenant has high yields, low prices

• Rent varies with price only– Tenant has low yields, high prices


Bushels Needed to Pay Cash Rent Iowa Averages

0

10

20

30

40

50

60

70

80

Bu. per acre

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Corn

Soybeans


Cash Rent as % of Gross Revenue

Iowa Average Yield x Oct.-Dec. Cash Price

35%

43% 42%44% 44%

34%

38%

35%

40%

30%

39%

47% 46%

52% 53%

48%

56%

49%

45% 46%

20%

25%

30%

35%

40%

45%

50%

55%

60%

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Corn

Soybeans

Mean

= 48%

Mean= 38%


Share of Gross RevenueCorn

• Cash rent is equal to 35% of gross income from corn

• Actual yield is 160 bu. of corn

• Harvest market price is $5.00

• Gross revenue is (160 x $5.00) = $800 per acre

• Rent is 35% x $800, or $280 per acre** The USDA FSA will likely determine this to be a Share Lease and Tenant would receive 65% of the DCP payments and the Landlord 35%.


Base Rent plus Flex PaymentSoybeans

• Base rent plus a % of gross revenue in excess of a predetermined level

• This level could be the historical yield x expected price

Example• Rent is $200 plus 40% the

gross revenue in excess of $500 per acre

• 2008 soybean price is $12/bu, actual yield is 50 bu.

• Gross revenue is $600• Flex Payment is $600 – $500

= $100 X 40% = $40 • Total rent is $240 per acre


Cash Rent Adjusts for Price Only

• Multiply actual price by fixed number of bushels.

• Or a minimum rent plus a bonus if price exceeds certain level.

• Tenant takes all the yield risk.

Example

• Cash rent is equal to the price of corn on Nov. 1 times 50 bu.

• Actual price is $5.00

• Rent is (50 x $5/bu), or $250 per acre.


Determining the Actual Yield

• Record weight or scale tickets when crop is delivered

• Combine yield monitor or weigh wagon data

• Use grain bin measurements

• Reflect the dry weight moisture


• Cash price at local elevator

• Take the average for several dates near harvest or when rent is paid

• Must agree on dates, location of delivery

• Owner should not share in gains from storage unless storage is provided

• Price should not be lower than the FSA county loan rate

Determining the Actual Price


Advantages of a Flexible Cash Lease

• Risks and profits are shared above a predetermined level of gross revenue

• Rent adjusts automatically to prices, yields

• May not need to renegotiate the cash rental rate each year (a multi-year

lease)

• Landlord not involved in paying input costs or in grain marketing.


FSA’s Interpretation of Flexible Cash Leases

Determining Cash or Share Leases (p-370 1-DCP)• Cash Lease: A lease is a cash lease if the lease

provides for only a guaranteed sum certain cash payment or a fixed quantity of the crop.

• Share Lease: A lease is a share lease if the lease bases the amount of rent on the quantity of crop produced on the farm or the proceeds derived from the crop on the farm, or the interest a producer would have had if the crop had been produced on the farm.

Source: USDA FSA, Iowa Field Office, Aug. 2008.

Flexible Cash Leases(Continued)

• Combination Lease: A lease, including a lease that provides for the greater amount or share of the crop or crop proceeds, shall be considered a share lease if the lease provides for both of the following:

1. Guaranteed amount, such as a fixed dollar amount or quantity. (AND)

2. Share of the crop or crop proceeds from the farm.


Flexible Cash Leases

• Two Basic types of Flexible Leases:

1. Flexible Lease based on Performance of the Farm.

2. Flexible Lease based on External Factors not associated with the farm.


Flexible Cash Leases & DCP

• Performance of the Farm

• If the terms of the lease stipulate that the rental payment is based specifically on the crop produced OR the crop proceeds from THE Farm, then program regulations provide that the arrangement shall be considered a share-lease and would require the landlord to receive a share of the DCP contract. (“At Risk”)


Flexible Cash Lease & DCP

• External Factors• If the terms of the lease stipulate that the rental

payment is based on a future market value, county average or some other external factor that is NOT associated with the specific farm’s production or price then it shall be considered a cash-lease. The landowner would be considered cash rent at zero share for DCP purposes.


Flexible Cash Lease & DCP

• In Share Leases neither the landlord nor the tenant may receive 100% of the DCP payment.

• The tenant and landlord are responsible for determining DCP Payment shares on these types of leases.

• The County Committee is required to review these contracts and determine if the shares appear to be fair according to the lease agreement.


Flexible Cash Lease, Shared DCP

• How to determine if shares designated by tenant and landlord are reasonable:

• EXAMPLE: (Share Lease)• Guaranteed or minimum amount is $150/A• Likely final lease amount $210/A • Flex portion of lease $60 ($210-$150)• Likely gross income = $600• Flex as percentage 10% ($60/$600)


Flexible Cash Lease, Shared DCP

(Continued)

• This would be considered a Flex Lease and would require the landowner to be on the DCP contract for a share.

• Tenant would remain eligible for 100% of CCC Loans and Loan Deficiency Payment benefits if applicable.


Flexible Cash Lease & No Shared DCP

• Actual Lease Example 2:• Greater of $210/A OR 35% of the NASS

county average yield X the Average of the CBOT closing price of corn the first 5 days of March 2008. (35% of $646 = $226)

• This is a CASH LEASE as the rent is not based on the production or proceeds from the farm.


Flexible Cash Lease, No Shared DCP

• Actual Lease Example 3:• $200 per acre base rent plus $2 per acre

for every $.10 per bushel the price of corn exceeds $5.00/bu on November 30 at XYZ Elevator.

• This is a CASH LEASE as the rent is not based on the production or proceeds from the farm.


Bonus Cash Rent Payment

“BONUS PAYMENTS”• Tenants that have or will enter into a (non

Flexible) Cash Rent Lease may be considering paying the landowner a “Bonus” payment due to higher than expected yields or increased market prices. This “Bonus” payment is NOT a violation of the DCP contract. Tenant would receive 100% of payments.


Landowners and DCP Requirements

Cash Rent Landowners have 3 options

• Sign the DCP 509 Contract at “Zero” share. (Signature Authority is Required)

• Provide the County Office with a Cash Rent Statement completed by the landowner for the specific Crop Year.

• Provide a copy of the actual written lease agreement. (not preferred)


FSA Requirements of a Flex Lease

• Landowners are NOT required to state the Cash Rent value amount nor is FSA encouraging them to do so on cash rent statements. The only time FSA would need the dollar amount is in reviewing the DCP share percentage for a landowner when a Flex Lease is considered a share lease.


Developing a Flexible Cash Farm Lease

• Record the rent formula in writing.• AgDM file C2-21 has a blank form• Test with several examples.• Develop a table of possible results• Set a minimum and maximum rent if desired.


Flexible Cash Rent Calculator

• Ag Decision Maker file C2-21– www.extension.iastate.edu/agdm/

• Actual rent for price and yields combos Corn and Soybean Prices

Corn Soybean 1.50$ 1.94$ 2.38$ 2.81$ 3.25$ 3.69$ 4.13$ Yield Yield 4.00$ 4.75$ 5.50$ 6.25$ 7.00$ 7.75$ 8.50$

50.00 25.00 100$ 100$ 100$ 100$ 100$ 101$ 104$ 75.00 31.25 100$ 100$ 100$ 101$ 104$ 113$ 124$

100.00 37.50 100$ 100$ 103$ 112$ 127$ 141$ 156$ 125.00 43.75 104$ 104$ 117$ 135$ 152$ 170$ 188$ 150.00 50.00 114$ 117$ 136$ 157$ 178$ 199$ 220$ 175.00 56.25 129$ 133$ 155$ 179$ 203$ 228$ 243$ 200.00 62.50 145$ 149$ 174$ 202$ 229$ 244$ 250$ 225.00 68.75 160$ 165$ 193$ 224$ 244$ 250$ 250$ 250.00 75.00 176$ 181$ 212$ 242$ 250$ 250$ 250$


Determining a Flexible Cash RentCase Study Farm

• Total of 200 Tillable Acre and Market Value: $5000/A • Corn Suitability Rating = 80 CSR (weighted average)• Cash Rent: $180/A in 2008 and $200/A base for 2009• Payment: ½ Cash Rent paid by March 15th, Balance

due Dec. 15th

• Flexible Payment would be made by March 15th following harvest

• Average Yield over 5-years: Corn = 175 bu/A (dry weight) and Soybeans = 51 bu/A

• Tenant: Non-land Average Costs Forecast for 2009: Corn = $550 and Soybeans = $300/A

• Ownership Costs: $25/A for property taxes and farm liability coverage.

2009 Flexible Cash Farm Lease(Example Only*)

• Set the Base Cash Rent plus a % of Gross Revenue in excess of a Trigger (corn and soybeans)

• Base Cash Rent is an average area cash rent.• * Multiply the County Yield x Local Cash Price

or a Posted County Price (Oct. to Dec.)• Create a Maximum Cash Rent Amount

* This Base Rent plus a Flex Payment does not reflect the farm’s production or price received. FSA will likely determine this to be a Cash Lease and Tenant receives 100% of DCP.

Source: Johnson, ISUE Farm Mgt., Sept. 2008.

Example Spreadsheet Basic Information

Source: ISUE Ag Decision Maker – File C2-21, Sept. 2008.

Expected Yield and Price Information

Source: ISUE Ag Decision Maker – File C2-21, Sept. 2008.

Adjusted Average Rent


Summary Farm Analysis


Example Risk Analysis


Tenant’s Profit Example


Owner’s/Landlord Profit Example


Summary Risk Analysis


2009 Flexible Cash Farm Lease(Summary Forecast)

• Base Cash Rent was $200/A plus: Corn Gross Revenue in excess of $800/A times 35%

• * County Average Yield was 180 bu/A and Posted County Price in the Fall 2009 was $5.50/bu

• Gross Revenue is $990• Minus the $800 Revenue Trigger is $190 x 35% = $67 • Total Cash Rent for Corn is $200/A Base Rent plus $67/A

Flex Payment totals $267/A for each Corn Acre• Maximum Rent of $300/A was not exceeded.

* FSA will likely determine this to be a Cash Lease and Tenant receives 100% of DCP payments.



Create a “Win-Win”

for both Tenant & Landlord

Use Flex Leases on Productive

Land

Build Farm Lease

Knowledge

Determine the Base Rent, Maximum Rent and Gross Revenue Triggers

Five Strategies to Flexible Cash Leases

Use the ISU Ag Decision

Maker Spreadshee

t

Thank You!

Steven D. JohnsonFarm & Ag Business

Management Specialist

(515) 957-5790 (after Sept. 1st) [email protected]

www.extension.iastate.edu/polk/

farmmanagement.htm

utilizing flexible cash farm leases september 2008 steven d. johnson farm & ag business...

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