Utilizing Flexible Cash Farm Leases September 2008 Steven D. Johnson Farm & 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

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 Source: ISU Extension, Aug

Bushels Needed to Pay Cash Rent Iowa Averages Source: ISU Extension, Aug

Cash Rent as % of Gross Revenue Iowa Average Yield x Oct.-Dec. Cash Price Mean = 48% Mean = 38% Source: ISU Extension, Aug

Share of Gross Revenue Corn 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%. Source: ISU Extension, Aug

Base Rent plus Flex Payment Soybeans 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 Source: ISU Extension, Aug

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. Source: ISU Extension, Aug

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 Source: ISU Extension, Aug

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 Source: ISU Extension, Aug

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. Source: ISU Extension, Aug

FSA’s Interpretation of Flexible Cash Leases Determining Cash or Share Leases (p 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

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. Source: USDA FSA, Iowa Field Office, Aug

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. Source: USDA FSA, Iowa Field Office, Aug

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”) Source: USDA FSA, Iowa Field Office, Aug

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. Source: USDA FSA, Iowa Field Office, Aug

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. Source: USDA FSA, Iowa Field Office, Aug

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) Source: USDA FSA, Iowa Field Office, Aug

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. Source: USDA FSA, Iowa Field Office, Aug

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 (35% of $646 = $226) This is a CASH LEASE as the rent is not based on the production or proceeds from the farm. Source: USDA FSA, Iowa Field Office, Aug

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. Source: USDA FSA, Iowa Field Office, Aug

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. Source: USDA FSA, Iowa Field Office, Aug

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) Source: USDA FSA, Iowa Field Office, Aug

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. Source: USDA FSA, Iowa Field Office, Aug

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. Source: ISU Extension, Aug

Flexible Cash Rent Calculator Ag Decision Maker file C2-21 – Actual rent for price and yields combos Corn and Soybean Prices Source: ISU Extension, Aug

Determining a Flexible Cash Rent Case 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. 15 th Flexible Payment would be made by March 15 th 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

Example Spreadsheet Basic Information Source: ISUE Ag Decision Maker – File C2-21, Sept

Expected Yield and Price Information Source: ISUE Ag Decision Maker – File C2-21, Sept

Adjusted Average Rent Source: Johnson, ISUE Farm Mgt., Sept

Summary Farm Analysis Source: Johnson, ISUE Farm Mgt., Sept

Example Risk Analysis Source: Johnson, ISUE Farm Mgt., Sept

Tenant’s Profit Example Source: Johnson, ISUE Farm Mgt., Sept

Owner’s/Landlord Profit Example Source: Johnson, ISUE Farm Mgt., Sept

Summary Risk Analysis Source: Johnson, ISUE Farm Mgt., Sept

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. Source: Johnson, ISUE Farm Mgt., Sept

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 Spreadsheet

Thank You! Steven D. Johnson Farm & Ag Business Management Specialist (515) (after Sept. 1 st ) farmmanagement.htm