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Published March 05, 2012, 12:44 PM

A little flexibility can go a long way

Interest is growing in flexible rent agreements, a North Dakota State University Extension Service expert says.

By: Jonathan Knutson, Agweek

Interest is growing in flexible rent agreements, a North Dakota State University Extension Service expert says.

“Both landlords and farmers seem to be taking more of a look at it,” says Andy Swenson, NDSU Extension Service farm management specialist. He was one of the presenters in a series of meetings on farmland leasing arrangements held across the state in February by the Extension Service.

The volatility of today’s crop prices encourages farmers to reduce risk, Swenson says.

Older farmers tend to be more interested than younger producers in flexible rent, says Brad Thykeson, a Portland, N.D., farmer and president of the North Dakota Grain Growers Association.

Younger farmers are heavily influenced by strong crop prices in recent years, which limits their interest in flexible rent. But older producers remember many years of poor prices, increasing their interest in reducing risk, Thykeson says.

A little background:

Most farmland in the region is rented for a fixed dollar amount per acre. A landlord receives that price regardless of crop prices and yields.

Crop shares are another option. This once-common practice, which no longer is used much, gives the landlord a share of the crop, often one bushel in five.

With crop shares, the landlord makes more money in good years and less money in poor years. From a farmer’s perspective, crop shares reduce both risk and potential return.

Flexible rent is a sort of hybrid, combining elements of both fixed rates and crop shares. Typically, flexible rent includes a base payment per acre to the landlord. That base payment can be supplemented by an additional payment, based on crop prices or yields or both.

As is the case with crop shares, though to a lesser extent, flexible rent allows farmers and landlords to share in the financial success when times are good and to share in the pain when times are tough.

Example of flexible rent

The North Central Farm Management Committee, which consists of extension services in 13 states, including North Dakota, South Dakota and Minnesota, and the U.S. Department of Agriculture’s National Institute of Food and Agriculture, gives this example of one type of flexible rent.

Don’t get wrapped up in the numbers used in the example. Focus instead on the concept involved.

Say that a farmer and landlord agree on a base rent of $175 per acre and a base crop price of $3.50 per bushel of corn. Assume further that the landlord will receive more money if the crop price averages more than $3.50 per bushel at a specified grain elevator over a specified period of time.

In this example, assume the price averages $3.80 per bushel at the specified elevator over the specified period. That would give the farmer a payment of $190 per acre, or the base rent of $175 plus $15 to reflect the higher-than-base crop price.

The math works out like this: Base price of $175 multiplied by 1.0857 (or $3.80 divided by $3.50) equals $190.

If the price averages $4 per bushel at the specified elevator over the specified period, the landlord would receive $200 per acre, or the base price of $175 per acre multiplied by 1.1428 ($4 divided by $3.50).

In this arrangement, the landlord benefits if crop prices rise, while the farmer is protected if crop prices don’t rise.

Need good relationship

In the recent past, few landlords had much enthusiasm for flexible rent, Swenson says.

“They like the certainty of knowing what they get” in the form of a fixed rent,” he says.

Many farmers, especially ones who rent land from a number of landlords, have said in the past that they prefer cash rent because flexible rent requires more record-keeping than they want.

But volatile crop prices are causing some farmers and landlords to reconsider the merits of flexible rents, Swenson says.

Farmers and landlords need a good relationship to make flexible rents work, Thykeson says.

Both parties need to realize that “we’re in this for the long haul,” he says.

Click here for more information on flexible rents.