Obtaining control of land through leasing has a long history in the United States. Leases on agricultural land are strongly influenced by local custom and tradition. However, in most areas, landowners and operators can choose from several types of lease arrangements.
With crop share arrangements, crop production and often government payments and crop insurance indemnity payments are shared between the landowner and operator. These arrangements also involve the sharing of at least a portion of crop expenses.
Fixed cash rent arrangements, as the name implies, provide landowners with a fixed payment per year. Flexible cash lease arrangements provide a base cash rent plus a bonus which typically represents a share of gross revenue in excess of a certain base value. Each leasing arrangement has advantages and disadvantages.
These advantages and disadvantages are discussed on the Ag Lease 101 website. Rather than focusing on the advantages and disadvantages of various lease arrangements, this article uses a case farm in west central Indiana to illustrate net returns to land derived from crop share, fixed cash rent, and flexible cash lease arrangements.
Net return to land from 1996 to 2020 from a landowner perspective were computed for a case farm in west central Indiana. The case farm had 3000 crop acres and utilized a corn/soybean rotation. Lease arrangements examined included a crop share lease, a fixed cash rent lease, and a flexible cash lease.
With the crop share lease the landlord received 50 percent of all revenue (crop revenue, government payments, and crop insurance indemnity payments). In addition to providing the land, the landowner paid 50 percent of seed, fertilizer, and chemical (herbicides, insecticides, and fungicides) expenses as well as 50 percent of crop insurance premiums. The case farm participated in government programs (e.g., ARC-CO and PLC programs), and purchased 80 percent revenue protection coverage.
Fixed cash rents were obtained from the annual Purdue Farmland Value Survey. Specifically, cash rents for average productivity land in west central Indiana were used. The flexible cash lease arrangement used a base cash rent that was 90 percent of fixed cash rent. In addition to the base case rent, the landowner received a bonus of 50 percent of the revenue above non-land cost plus base cash rent if revenue exceeded non-land cost plus base cash rent.
Revenue included crop revenue, government payments, and crop insurance indemnity payments. All cash and opportunity costs, except those for land, were included in the computation of non-land cost. More discussion regarding possible parameters that can be used for flexible cash leases can be found in Langemeier (2018).
Comparisons of Net Return to Land among Leasing Arrangements
Before making comparisons between leases, we will briefly discuss bonus payments for the flexible cash lease. Per acre bonus payments for the flex cash lease arrangement are illustrated in figure 1. Bonus payments were incurred in 14 out of 24 years from 1996 to 2020. Payments ranged from less than $1 per acre in 2006 and 2018 to $98 per acre in 2010. From 2007 to 2013, the average bonus payment was $59 per acre. Except for the small payment in 2018, the annual bonus payment from 2014 to 2019 was zero. The bonus payment in 2020 was approximately $51 per acre.
Pairwise comparisons were used to compare the three leasing arrangements. Figure 2 compares the crop share lease to the fixed cash rent lease. The landowner net return for the crop share lease was more variable. As would be expected, net return for the crop share lease increased faster when revenue was increasing, but also decreased more rapidly when revenue was declining.
The net return for the crop share lease was higher than the net return for the fixed cash rent lease in 1996, and from 2007 to 2012. From 2013 to 2019, the net return for the crop share lease was from $29 per acre (in 2019) to $122 per acre (in 2015) below the net return for the fixed cash rent lease. On average, from 2013 to 2019, the net return for the crop share lease was $57 per acre below the net return for the fixed cash rent lease. In 2020, the net return for the crop share lease was $12 per acre higher than the net return for the fixed cash rent lease.