Variable Cash Rents: Types and Evaluation Gary Schnitkey and Ryan Batts University of Illinois

Motivation General movement from share (the “perfect” risk sharing lease) to cash rent –Land owners view share leases as complex –Land owners concerned with cash flow –Operators concerned with co-mingled grain –Stickiness of while land owners demanding a higher share (some modified share leases with additional rent) Since 2006, difficulty in setting cash rent: –Higher returns to split between land owner and operatr –Higher price volatility –Higher year-to-year variability in farm returns

Type: Variable Rent with Bonus ItemDescriptionExample ISPFMRA Survey Results Minimum rentMinimum rent under agreement$160All used Base crop revenue Crop revenue over which landlord gets a share $450 Rent factorPercent of crop revenue45% Maximum rent None Used Example 1: Gross revenue = $380 Rent = Minimum = $160 Example 2: Gross revenue = $600 Rent = $250 = $160 minimum + ($600 gross - $450 Base) x.45

Type: Percent of Crop Revenue ItemDescriptionExample ISPFMRA Survey Results Minimum rentMinimum rent under agreement$160All used Rent factorPercent of crop revenue36% Rent is the higher of the minimum cash rent or crop revenue x rent factor Example 1: Crop revenue = $380 Rent = $160 max($160,$133 = 380 x.36) Example 2: Crop revenue = $600 Rent = $216 = max($160, $216 = $600 x.36)

Determining Gross Revenue Gross Revenue = Yield x Price Yield options: –Farm yield –Expected county yields Prices (What and timing): –Alternatives Local delivery point Future prices * Crop insurance (base, harvest) * –Timing and collection Suggest getting through spring and harvest * Will impact rent factor level

Setting Rent Factor Cash rent / crop rev have averaged 30 % to 35% over time Setting a rent $10 below average and varying does not reduce risk For bonus rents, having a low base rent, a high base revenue and a high rent factor reduces risk

Farm Rent Evaluator Evaluates alternative leases including share rent, cash rent, and variable leases For download from FAST section of farmdoc (

Variable rents give essentially the same return as cash rent, with lower risk

Summary Variable cash rent is a way of reducing risk to farmer Variable rents with “high” minimums do not reduce risk Will not counter changing input costs Still not as risk sharing as a share rent lease