Cash Rent With Bonus
Posted: December 27, 2011
So it creates a bit of a dilemma for a farmer commit to paying a higher land rent to compete when they know that prices will cycle down as they always do and what seems affordable now may not be so affordable when grain prices drop.
The concept of variable or flexible land rent is not new but may be something to consider given this scenario. Leases that adjust rents only on either price or yield may actually increase a tenant's risk in some years.
Adjustments for a combination of price and yield will more closely reflect net income at the crop. A recent article in Farm Industry News by Gary Schnitkey, University of Illinois, describes a method of determining a cash rent plus bonus based on crop revenues exceeding a pre-determined level. In this method, parameters are set that the landlord and tenant agree to before signing an agreement.
· Base cash rent-the minimum that the landowner will accept
· Maximum cash rent that the tenant will pay
· Crop revenue trigger- a level above which the landowner will get a percentage of, specific to each crop
· Criteria on which to base the price. This might be a matter of using the average cash price at various grain dealers near the farm.
· The percentage of the amount over the crop revenue trigger that the landowner will receive as a bonus. This might also be different for each crop. The percentage of the landlords’ bonus should relate to the minimum rental price i.e. the landowner assuming less risk by asking for a higher minimum rental rates should get a lower bonus percentage.
· Average bonus amount is weighted by the portion of acres of each crop grown on that farm that year
Knowing the non-land production costs of each crop is critical in determining the crop revenue trigger. This revenue trigger should be at least equal to or greater than these production costs plus the minimum base rental rate.
For more information on this method including a worksheet showing example calculations, go to http://farmdoc.illinois.edu/manage/newsletters/fefo11_17/fefo11_17.html