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Flexible-Cash Rents for Farmland

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Abstract

Farmers face many business risks relating to production, prices, technological change, legal and social issues, and human resources. A tenant can share production and price risks with the landlord through a crop-share lease. This enables the landlord to share in higher or lower-than-expected yields and/or prices. However, the typical crop-share lease also requires the landlord to share the cost of fertilizer, seed, and chemicals and pay to have his share of the crop harvested. Income from such a share lease is usually considered as self-employment income for the landlord, which some landlords would prefer to avoid. A subsequent fact sheet in this series will address farm-rental tax issues. In contrast, a flexible-cash lease will allow landowners to share some of these risks without becoming subject to selfemployment taxes. And, like a fixed-cash lease, the tenant doesn’t have to keep track of the landowner’s share of expenses. Nor does the landowner have to make grain marketing decisions. Flexible-cash rent usually pertains only to cropland, with fixed rents for buildings, farmstead facilities, and relatively minor acreages of pasture, hay, or woodland. Both parties need to agree on the amount of these “non-flexible ” rents prior to start of the lease period. In addition, the flexible-cash rent keeps the landowner eligible for potential “windfall profits” should they happen. Some disadvantages include the requirement of more records and a written lease agreement compared to a possible fixed-cash rent. In addition, the tenant should expect less income over time because he is transferring more of the risk to the landowner. An Ohio 1999 research project revealed that at least 8 percent of cash leases had some flexibility provisions. A 1996 Ohio study revealed few flexible cash leases. Types of Flexible Rents There are a number of ways to create a flexible-cash rent arrangement including adjustments for crop price only, yield only, or based on both price and yield changes. Flexing Rents for Price At least four methods can be used to flex for price only

Topics: Robert D. Fleming, District Specialist, Farm Management, Northwest District Donald J. Breece, District Specialist, Farm Management, Southwest District
Year: 2011
OAI identifier: oai:CiteSeerX.psu:10.1.1.193.2349
Provided by: CiteSeerX
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