Determining an Equitable Crop Share Lease AgLease101.org a product of the North Central Farm Management Extension Committee

AgLease101.org © North Central Farm Management Extension Committee Should a crop-share arrangement be used? Advantages For operator, lower operating capital requirements Shared management Crop sales, input purchases may be timed for tax purposes Risks shared Landowner can establish material participation 2

AgLease101.org © North Central Farm Management Extension Committee Should a crop-share arrangement be used? Disadvantages For landowner, income will be variable Increased record-keeping –Shared expenses –Government programs –Crop insurance Landowner must make marketing decisions (unless it is a nonmaterial participation lease) 3

AgLease101.org © North Central Farm Management Extension Committee Should a crop-share arrangement be used? Notes Sharing arrangement may need to change as prices or technology change For landlord, material participation may reduce Social Security benefits in retirement 4

AgLease101.org © North Central Farm Management Extension Committee Establishing a Crop-Share Arrangement Share yield-increasing variable expenses in the same percentage as the crop Adjust arrangement as technology changes relative costs Share total returns in the same proportion as parties contribute resources At the end of the lease, compensate operators for portion of long-term investments made that are not fully depreciated 5

AgLease101.org © North Central Farm Management Extension Committee Establishing a Crop-Share Arrangement Maintain open and honest communication –Make sure both parties know and understand their responsibilities. –Written leases encourage communication up front and clarify plans. 6

AgLease101.org © North Central Farm Management Extension Committee Share yield-increasing variable expenses in the same % as the crop is shared Encourages optimal input use. Yield increasing inputs may include: Fertilizer Irrigation water Herbicides Seed 7 Input Yield

AgLease101.org © North Central Farm Management Extension Committee Share yield-increasing variable expenses in the same % as the crop is shared For example, at $0.40/lb for fertilizer, $4 per additional bushel of corn yield 8 Fertilizer (lb/a)v Yield (bu) Income ($/a) Return over fertil. cost Operator position for income (I) and cost (C) 100% I 100% C 50% I 100% C 50% I 0% C 50% I 50% C

AgLease101.org © North Central Farm Management Extension Committee Adjust arrangements as technology changes relative costs Yield-increasing inputs shared in the same % as the crop True substitution inputs paid by the party responsible for them in the original lease Both? Address in lease –Corn seed with bundled traits 9

AgLease101.org © North Central Farm Management Extension Committee Share total returns in the same proportion as parties contribute inputs 10

AgLease101.org © North Central Farm Management Extension Committee Compensate operators for long-term investment remaining If the operator shares in the cost of an input that has a useful life beyond the life of the lease, the lease should stipulate how the tenant will be compensated for any unused portion. –Lime –Alfalfa seed or establishment costs –Tiling –Underground pipe 11

AgLease101.org © North Central Farm Management Extension Committee Developing an Equitable Crop-Share Lease Arrangement Crop Budget Approach Identify items and values/charges Land –Value –Interest on land –Cash rent –Real estate taxes –Development 12

AgLease101.org © North Central Farm Management Extension Committee Developing an Equitable Crop-Share Lease Arrangement (continued) Crop machinery (and irrigation equipment, if applicable) –Depreciation –Repairs –Taxes –Insurance –Interest 13

AgLease101.org © North Central Farm Management Extension Committee Developing an Equitable Crop-Share Lease Arrangement (continued) Labor –Value is part of bargaining process –Caution: avoid forming a partnership Management –One alternative is a percent of the average capital managed, e.g. 1 to 2.5% –Professional farm managers may charge 5- 10% of adjusted gross receipts Custom rates 14

AgLease101.org © North Central Farm Management Extension Committee Cropland Rent-to-Value Ratios by Region 15

AgLease101.org © North Central Farm Management Extension Committee Contributions Approach Percentage contribution of each party is determined (Worksheet 1) Parties share other operating expenses and income (crops, government payments, other income) in the same percentage Note: use average costs for crop rotations 16

AgLease101.org © North Central Farm Management Extension Committee Desired Share Approach Parties specify a given percentage share basis, e.g., and adjust contributions to fit this percentage Use Worksheet 1 to discuss alternatives 17

AgLease101.org © North Central Farm Management Extension Committee Put the Agreement in Writing Encourages a detailed statement of the agreement, with better understanding of expectations by both parties Serves as a reminder of agreed upon terms Guide to heirs of either party Documentation for tax purposes See NCFMEC-02 for a sample form 18

AgLease101.org © North Central Farm Management Extension Committee Lease Publications at AgLease101.org Fixed and Flexible Cash Rental Arrangements For Your Farm (NCFMEC-01) Crop Share Rental Arrangements For Your Farm (NCFMEC-02) Pasture Rental Arrangements For Your Farm (NCFMEC-03) Rental Agreements For Farm Buildings and Livestock Facilities (NCFMEC-04) Beef Cow Rental Arrangements For Your Farm (NCFMEC-06) 19

AgLease101.org © North Central Farm Management Extension Committee North Central Farm Management Extension Committee AgLease 101 was developed with funding provided by the North Central Risk Management Education Center. Providing leadership in the development of high quality research-based extension programs and publications that anticipate and meet the ever-changing business management educational needs of agricultural producers of the North Central States. Our programs and publications capitalize on the expertise of farm management faculty from throughout the region and country.