Comparison of net returns from alternative leases • farmdoc daily
Obtaining control of land through leasing has a long history in the United States. Leases on agricultural land are strongly influenced by local customs and traditions. However, in most areas, landowners and operators can choose from several types of rental agreements. With crop sharing agreements, agricultural production and often government payments and crop insurance indemnities are shared between the landowner and the operator. These arrangements also involve the sharing of at least part of the harvesting expenses. Fixed cash rent agreements, as the name suggests, offer landowners a fixed payment per year. Flexible cash rental agreements provide a base cash rent plus a bonus which is usually a share of gross income above a certain base value. Each rental agreement has advantages and disadvantages. These pros and cons are discussed on the Ag Lease 101 website. Rather than focusing on the pros and cons of various rental agreements, this article uses a case farm in west-central Indiana to illustrate the advantages and disadvantages of various rental agreements. net income from land derived from crop sharing, fixed cash rent and flexible cash rental agreements.
The 1996-2020 net return on land from a landowner’s perspective was calculated for a case farm in west-central Indiana. The case farm had 3,000 acres of crop and used a corn / soybean rotation. The rental agreements examined included a sharecropping lease, a fixed cash lease and a flexible cash lease.
With the Crop Sharing Lease, the landlord received 50 percent of all income (crop income, government payments, and crop insurance compensation payments). In addition to providing the land, the owner paid 50 percent of the expenses for seeds, fertilizers and chemicals (herbicides, insecticides and fungicides) as well as 50 percent of crop insurance premiums. The case farm participated in government programs (eg, ARC-CO and PLC programs) and purchased 80 percent income protection coverage.
Fixed cash rents were obtained from Purdue’s Annual Farmland Value Survey. Specifically, cash rents for medium productivity land in west-central Indiana were used. The flexible cash rental arrangement used a base cash rent that was 90 percent of the fixed cash rent. In addition to the base rent, the landowner received a premium of 50 percent of the income above the non-land cost plus the basic cash rent if the income exceeded the non-land cost plus the basic cash rent. The revenues included harvest revenues, government payments, and crop insurance indemnity payments. All cash and opportunity costs, except land, have been included in the calculation of non-land costs. A more in-depth discussion of the possible parameters that can be used for flexible cash leases can be found in Langemeier (2018).
Comparisons of net return on land among rental agreements
Before making any comparisons between leases, we’ll briefly discuss bonus payments for flexible leasing. The per acre bonus payments for the flexible cash lease are shown in Figure 1. The bonus payments were made in 14 of the 24 years from 1996 to 2020. The payments ranged from less than $ 1 per acre. in 2006 and 2018 to $ 98 per acre in 2010. From 2007 to 2013, the average premium payment was $ 59 per acre. With the exception of the small payment in 2018, the annual bonus payment from 2014 to 2019 was zero. The premium payment in 2020 was around $ 51 an acre.
Pairwise comparisons were used to compare the three rental agreements. Figure 2 compares the sharecropping lease with the fixed cash lease. The landowner’s net return for the sharecropping lease was more variable. As might be expected, the net return on the sharecropping lease increased faster when revenues increased, but also decreased faster when revenues decreased. The net return on the sharecropping lease was higher than the net return on the fixed cash lease in 1996 and 2007 to 2012. From 2013 to 2019, the net return on the sharecropping lease was $ 29 per acre (in 2019) at $ 122 per acre (as of 2015) below the net return on the fixed-rent cash lease. On average, from 2013 to 2019, the net yield on the sharecropping lease was $ 57 per acre lower than the net yield on the fixed-rent cash lease. In 2020, the net yield on the sharecropping lease was $ 12 per acre higher than the net yield on the cash lease.
Figure 3 compares the net yield of the flexible cash lease to the net yield of the fixed cash rent lease. This graph looks remarkably similar to Figure 2. The net returns on the flexible cash lease were more volatile than the net returns on the fixed cash lease. The net return on flexible leasing was relatively higher in 1996, 2007-2008 and 2010-2012. During the period 2007 to 2013, the average net yield on the flexible cash lease was similar to the average net yield on the shared rental lease and $ 38 per acre higher than the average net yield on the fixed cash lease. From 2014 to 2019, the annual net yield on the flexible cash rental lease was on average $ 26 per acre lower than the net yield on the fixed cash rental lease. However, it is important to note that during this same period, the net yield on the flexible cash lease was $ 36 per acre higher than the net yield on the sharecropping lease. In 2020, the net yield on the flexible cash lease was $ 26 per acre higher than the net yield on the fixed cash lease and $ 14 above the net yield on the crop sharing lease.
The differences between the fixed cash rent lease and the other two rental agreements are shown in Figure 4. This graph was created by subtracting the fixed cash rent payments per acre from the net yield of the flexible cash lease and the net yield. net return on crop sharing lease. As noted above, the net returns of the flexible cash lease mimic those of the crop sharing lease. However, there are some differences in the trends of these two leases. The flexible cash lease did not grow as much as the sharecropping lease in 2007, 2008 and 2010. More importantly, from a downside risk perspective, the flexible cash lease did not shrink as quickly as the sharecropping lease from 2013 to 2015, and was relatively higher from 2016 to 2019.
What about the differences in the net returns of the three harvest leases in 2021? Early projections for 2021 show a relatively large potential bonus for the flexible cash rental lease (around $ 75 per acre). In addition, the net returns from the sharecropping lease and the flexible cash rental lease are expected to be $ 30 to $ 50 higher than the net returns from the fixed cash rental lease.
Summary and conclusions
This article used a case farm in west-central Indiana to compare the net yield of land for crop sharing, fixed cash rent, and flexible cash leases. Average net returns from land from the landowner’s perspective were similar among the three rental agreements. The flexible cash lease mimicked the ups and downs of the crop sharing lease. However, the upward and downward peaks for the flexible cash lease were less pronounced than those for the split-harvest lease. The choice among leases depends on a landowner’s desire to benefit from improvements in income from crop sharing and their ability to withstand downside risks. Crop share and flexible cash leases allow landowners to better capture annual improvements in crop income, but also increase the likelihood of significant downward movements in annual net income.
Ag Lease 101, www.aglease101.org/, accessed August 2, 2021.
Langemeier, M. “Flexible Cash Leasing Comparisons”. farmdoc every day (8): 198, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, October 26, 2018.