The basics of flexible cash lease arrangements
November 13, 2014
BROOKINGS, S.D. – Flexible leases may offer limited financial protection to farmers should growing conditions or market prices deteriorate, or production costs escalate.
"Unlike a fixed cash lease contract, where the per acre rent amount is agreed upon well before field work begins, the rent amount with a flexible lease adjusts depending on final yield, commodity prices, cost of production, or some combination of all three," explained Kim Dillivan, SDSU Extension Crops Business Management Field Specialist.
For those unfamiliar with a flexible cash lease, Dillivan explained that it is a contractual arrangement between a landowner and operator in which the final rent payment is determined after the crop has been harvested,"
"Flex lease arrangements also offer opportunities for landowners to benefit should commodity prices rise or better than expected yields occur," he said. "In recent years, gains in commodity prices and increasing yields have increased the popularity of flex leases among landowners, and flex leases that allow the sharing of market and production risk are popular with some producers."
Advantages of Flex Lease Contracts
Dillivan said the general advantage of a flex lease is the avoidance of committing to a fixed rent amount at a time when many production and market variables remain unknown. "Depending on circumstances, flex leases offer advantages over fixed cash lease contracts and crop-share leases," he said.
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Some of these advantages include:
*For the landowner, an opportunity to benefit financially from higher yields and favorable commodity prices.
*For the operator, some level of risk protection should costs rise or revenue disappoint.
Disadvantages of Flex Lease Contracts
Along with the benefits, Dillivan said flexible lease arrangements also present some risks to both landowners and operators.
*For the landowner, a flex lease can increase their exposure to risk (compared to a fixed cash lease agreement).
*For the operator, higher revenue from increased yields and/or prices is shared with owner.
*For both parties, flex leasing greatly increases the contract's complexity.
Different Methods for Flexing Rent
There are many different ways for flexing rent, including yield, price, cost, or some combination of each. "All of these are accompanied by some degree of risk and landowners and producers are encouraged to carefully consider each type before making a final decision," Dillivan said.
He added that because a flex lease specifies a rent payment amount that is determined after the contract is signed, these arrangements require that both parties fully agree to, and understand completely, the exact mechanisms for calculating payment.