Structuring your lease agreementsStructuring your lease agreements
When it comes to leasing pasture or farm land, know your options.
August 24, 2021
When it comes to leasing farm land and pasture, there are many things to consider both as the owner and the renter.
Having been on both ends of these agreements, it definitely is important to think about all of the “what if” scenarios to ensure that all parties are protected. And for a long-term relationship to continue between the two parties, the terms and conditions must be clearly communicated and discussed before signing on the dotted line.
It’s renewal season for many property owners, and you may find yourself in these discussions right now or in the upcoming months.
Perhaps you are considering updating your terms after decades of the same-old, same-old, or maybe you find yourself in a place where you’re dealing with new tenants or new owners.
The dynamics of renting ground can be deeply personal with many potential pitfalls as it relates to rates, off-farm stakeholders, competition from neighbors, the cost and labor of land or fencing improvements, etc.
So what are the most typical lease agreement structures? There’s certainly no one-size-fits-all approach, but Farmers National Company breaks down the basic lease agreements that can minimize risk and offer opportunities to those involved in the agreement.
These lease agreements include:
Cash rent lease — According to Farmers National Company, “Typically calculated on the basis of a fixed number of dollars per acre. In the past, many of these leases called for approximately one-half of the rent in the spring with the remaining rent due in the fall. Today most cash rent is paid up front.”
Bushel lease — “This lease specifies a fixed number of bushels of a particular commodity to be delivered to a specified elevator by a certain date without cost to the owner,” says Farmers National Company. “The number of bushels is determined by negotiation, but in many cases is approximately one-third of normal production. No government payments are paid to the landlord on a bushel lease.”
Net share lease — Farmers National Company explains, “This leasing alternative has gained in popularity as an alternative to cash rent. It differs from the bushel lease in that the owner receives a specified percentage of the crop. Thus, if the crop yields are good, the rent goes up. The only cost the owner is usually responsible for is the drying and/or storage of their share of the grain at harvest. All other production costs are paid by the operator.”
Crop share lease — “Under this arrangement the owner pays a share of the input costs and receives a share of the crop,” per Farmers National Company. “In many areas, the owner shares in 50% of the cost of the seed, fertilizer, and chemicals, and then receives 50% of the crop. In other areas, this may be 25%, 33-1/3%, or 40% share, depending upon the amount of weather risk involved and the consistency of production over time. With changing farming methods and increasing land values, this lease may not be as competitive as it once was. To address this issue, many leases are now being tailored to each farm situation, and new percentages, such as 55% owner - 45% operator, are emerging or supplemental cash rent. Another alternative is to adjust the percentage of input cost paid by the owner.”
Finally, custom blend leases or custom operation leases can offer unique opportunities to mitigate risk, share on labor, input and machinery costs, or further incentivize both owner and renter to best match production and profit goals.
Specifically for pastures and hay ground, Iowa State University Extension (ISU) offers advice on calculating cash rents based on current market rates, a return on investment in pastureland, forage value, carrying capacity, and more.
“Is there a simple and uniform method of figuring a rental rate for pasture and hay land?” asks Don Hofstrand, retired ISU Extension value-added agricultural specialist. “Probably not, but guidelines are available. There are several methods for computing a pasture rental rate, and several factors that influence the rental rate.
“Pasture rental rates vary according to the quality of stand, type of forage species, amount of timber, condition of the fences, availability of water, and previous fertility practices on the pasture.”
Here are a few examples of calculating pasture and hay rental rates using various factors.
Forage value — “To compute a rental rate based on forage value, estimate the expected pasture or hay production per acre and multiply by either 25% of the price of grass hay during the grazing season for pasture, or 35% of the price of hay for an established stand of hay. If the tenant supplied labor and machinery for establishing the hay crop and pays half of the seed and fertilizer costs, then a rental rate equal to 50 percent of the value of the hay crop would be more appropriate. Use hay prices corresponding to the type and quality of the stand,” says ISU.
Rent per head per month — “With this method, the livestock owner pays rent according to the number of animals grazed and length of time the pasture is used,” explains ISU. “This is measured by computing the animal unit months (AUMs). An AUM is the amount of forage required to support a 1,000 pound cow with a calf up to 4 months of age for one month. Table 2 can be used for figuring AUMs. For example, 10 cows and calves pastured for three months equals 30 AUMs (10 x 1.0 x 3). Note that forage consumption normally parallels the weight of the animal.”
Rent per pound of gain — “With this method, pasture rent is based on the added weight the livestock gain while they are on pasture,” says ISU. “This approach is best suited for stocker and feeder cattle rather than beef cows. To determine the rent payment, it is necessary for the cattle to be weighed or an average weight estimated before they are placed on pasture and after they are taken off pasture. This may not be practical in some situations.”
What other considerations do you think are important for structuring leases? Please, share in the comments section below.
The opinions of Amanda Radke are not necessarily those of beefmagazine.com or Farm Progress.
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