Consider Using a Flex Cash Lease for 2021, or a Modified Fixed Cash Lease
This is not a substitute for legal advice. To post this story please contact the author.
As we move through 2020 and a potentially lower period of crop prices due to issues associated with the global pandemic, many of you might be looking at renewing existing agricultural leases. While you might be utilizing fixed cash rental rates or crop-share rents, with projected low crop prices, now might be the time to consider using a flex-cash lease. Flex-cash leases are a rental agreement which works like a hybrid of the cash lease and state that the tenant will pay in proportion to either or both the price and yield level. This form of a lease might be better suited for producers who are working to handle low crop prices in their operations. At the same time, if you do not want to consider a flex cash lease, you might want to consider adding language to your fixed cash lease which could reduce the rental rate if prices stay low.
What is a Flex Cash Lease?
A flex-cash lease is similar to a fixed cash lease in that the landlord charges the tenant an amount per acre, but rent can fluctuate up or down depending on crop yield, market price, a combination of both, or any other method agreed to by the landlord and tenant. A flex-cash lease allows the landlord to gain when market prices or crop yields increase during the crop year. But in return for the possible increase in rental payments, a landlord also loses when market prices or crop yields decrease. Under a flex-cash lease, the tenant benefits from the possibility of lower rent payments during low-yield or low-priced years. The tenant also has to share gains, however, during high-yield or high-price years through higher rental payments. This publication by the University of Nebraska does an excellent job of laying out using a flex lease and calculating the changes in rent; see here.
How to Use a Flex-Cash Lease
To get a sense of how a flex-cash lease operates, let us look at an example. Farmer Green rents 100 acres of irrigated cropland from Landlord Burns with a flex-cash lease. The terms of the flex-cash lease set a base rent at $150/acre and flexed based on corn’s price. On the first day of the lease, the local elevator’s cash grain price is $4.00/bu, and when the rental payment is made later in the year, the cash grain price at the local elevator is $4.25/bu. The rental rate would be $150 * (($4.25-$4.00)/$4.00)) or $150 * ($0.25/$4.00) or $150 * (0.0625) or $9.38/acre. The final rent payment would increase by $9.38/acre to be $159.38/acre or ($150 + $9.38) or $15,937.50 for the 100 acres. If the price when paying the rent is $3.38, the final rental payment would be $150/acre or $126.75/acre, depending on how the lease is structured. This is just one example of how a farm lease could be structured. You could also look at potentially utilizing gross revenues on the farmland, yield, or anything else the two parties could agree on.
In the second example, the rental rate could drop below the $150/acre if the price drops. This can be solved by setting a floor rental rate, such as $150/acre or another value. USDA requires that to be considered a “cash lease” and not a “crop share lease.” A flex-cash lease without a floor could be considered a crop share lease. It would require splitting Farm Bill program payments and other USDA support program payments (such as Market Facilitation Program and Coronavirus Food Assistance Program payments) with the landlord. Looking at the example, the floor rental rate could be the $150/acre or another number that the landowner and the tenant agree on.
These are just some examples of how you can utilize a flex-cash lease. The University of Nebraska publication listed earlier is an excellent resource to start thinking about how to structure a flex-cash lease that works for you.
If you need help starting a flex-cash lease, the University of Maryland has a form flex-cash lease available here. Keep in mind, when we developed that form, we limited the flexing options, and as you are probably learning, the possibilities are broader than that. You can also add in your flex option, and you do not have to use the options listed.
In this time of considerable uncertainty, a flex-cash lease may provide an opportunity to manage risks that generally cannot be handled with a fixed cash lease or a crop-share lease. Work with your landlord to develop a flex-lease option that will work for both of you and account for this uncertainty. Make sure you are communicating with the landlord so they understand the current farm economy and why this form of leasing might be needed in 2020.