Leasing farmland is easy, but it’s not simple. Unlike commercial or residential real estate, farmland is renowned for its nearly 100% occupancy rate. If a farmer retires, there is often a line of people eager to assume the farm lease on that property. Finding someone to farm your land – that’s the easy part.

Now for the not-so-simple part: What’s the farm lease worth? The challenge in this question lies in the complexity and differences across various farming operations. An established farmer with large equipment will see less value in a small farm, while a young beginning farmer with limited opportunities and smaller equipment will find more value in that same small farm. If you take that farm lease to the open market, you will likely see a broad range of interest, and it’s hard to grasp what the farm is worth. While the saying “It’s worth what someone is willing to pay for it” is applicable, you need to make sure you’re talking to the right “someone."

Adding another layer of complexity to the lease valuation component is the fluctuation of yields, prices, and production costs. One year commodity prices may be high, but production low, or production high along with the cost of production. Farm leases are often signed a year in advance of when the crop is harvested, and these variables have time to adjust, which can increase or decrease profitability. Farmland rental rates are often “chasing” the market, where the lease signed for next year is based on production and prices from the closing crop year.

While the complex variables above cannot be eliminated, there is a farmland leasing option that removes some guesswork and helps both the farmer and landowner capitalize on the true, real-time value of the farm lease. This option is what many refer to as a “Flex Lease." A flex lease consists of a base rent that is guaranteed to the landowner along with the opportunity for a flex payment based on the farm's performance. There are endless variations of flex leases, but successful agreements for both parties often encompass actual yield data and marketing-year prices for crops grown. A “Trigger Price” is then set with the farmer based on their cost of production, and a percentage of the landowner’s share over the trigger is established.

Once the base rent, trigger price, owner percentage, and yield and price determinates are in place, it’s a waiting game until harvest. Following harvest, the actual yield of the farm is multiplied by the determined price, and the gross revenue of the farm is either over or under the trigger price. If under, the landowner only receives the base rent for that year. If the gross farm revenue is over, the overage amount is multiplied by the owner's share, and that payment is made to the owner on top of the previously paid base rent. The example below assumes a corn yield of 260bpa, a corn price of $4.55/bushel, a trigger price of $1,000/acre, an owner share of 35%, and a base rent of $275/acre:

Corn Ex: 260bpa x $4.55/bu = $1,183 - $1,000 (trigger) = $183 shared revenue x 35% owner share = $64.05/acre flex payment to the owner + $275 base rent = $339.05/acre total cash rent

The example above illustrates how a flex payment can be paid on favorable yields, prices, or both. If a flex payment is not triggered, the base rent is the only income for the year. Flex leases work well on all farms, but especially marginal farms that carry more risk but are capable of high yields or price rallies.

Each landowner is different, and while some landowners may be more comfortable with a high cash rent lease, others may be willing to make concessions on the base rent and roll the dice for a higher flex payment. In terms of multi-year farm leases, flex provisions shine due to their ability to capture revenue from unforeseen market rallies or high production years that would have been missed in a fixed cash rent lease.

Tying it all together, the small farm referenced at the beginning of this article may be a perfect candidate for a flex lease. Large farmers may not find value in small farms, and small farmers may not have the resources to be competitive in cash rental markets. A flex lease could be drafted with the smaller operator, at a reduced rental rate, and the flex provision will adjust annually to keep rent within the true-market value.

Flex leases are an important tool in the Peoples Company toolbox, and they can be implemented for a variety of reasons. If you are interested in how a flex lease can simplify your farmland leasing process, reach out to a Peoples Company Land Manager to learn more.