As we flip the calendar page, and you’ve resolved to manage your business better and treat others better, the issue that consolidates all of those is the issue of farm leases. Different states have different leasing laws, and we can’t begin to analyze all of them, so let’s put a couple issues on the table for discussion: 1) renegotiating your cash rent lease with the landowner, and 2) ensuring that FSA rules correlate with your lease. We’ll save the easier issues for another time.

For the past couple weeks it has been interesting to watch several of the farm publications and their websites draw attention to the December 20 edition of Cornhusker Economics written by Bruce Johnson, Allen Prosch, and Aaron Raymond at the University of Nebraska, who suggest the neighborly thing to do is re-negotiate your cash rent lease, giving your landowner a more equitable share of the pie in the wake of higher commodity prices. Of course, that is based on the assumption that the operator’s share is currently more equitable than the owner’s share. While you may think such an idea is a bit presumptuous, let Johnson and colleagues make their pitch….

At current commodity prices, new crop corn might be worth $1 per bushel more than it was at this time last year; which means the operator of a cash rent lease could have a $200 windfall next harvest. Johnson and colleagues say, “Unfortunately, there are extreme examples of both (1) landowners demanding, and sometimes getting, exorbitant cash rent increases for 2007, and (2) tenants quickly trying to lock in last year’s cash rents for 2007 with their naïve and uninformed landowners. Neither extreme is in the best interest of all parties being served.”

They say the “noble” thing to do is for the operator to take the initiative to renegotiate and offer the landowner a higher rent of a cash rent lease. While that reduces operator income, it would cement a long term relationship between the operator and the landowner and be a win-win outcome for both. Maybe the landowner has already suggested a re-negotiation, wanting more of the operator’s money. That may be a bit too aggressive and would not do anything for the long term relationship, which should be seen as nothing more than a one year episode of taking advantage of the operator.

Any change should be viewed as being applicable for only one year, until this changing environment of grain prices can be assessed as being a trend, or just an anomaly. The new lease terms should also specify when the added rent might be paid, and that will likely be in a second payment or one following harvest when cash flow would be available. Finally, Johnson and his Nebraska colleagues suggest the addition of a clause that would allow an escape from the higher rent, should grain prices fall unexpectedly, even though an operator should be adequately hedged along with the rent commitment.

The second rent issue involves clarification of rent agreements, in conjunction with Farm Service Agency regulations. University of Illinois ag law specialist Don Uchtmann says there could be problems determining whether a variable cash rent scenario was a cash lease or a share lease. And since variable cash rents are becoming increasing popular because of their flexibility in addressing variable price and yield scenarios, there will be an increasing number of problems with defining the lease for tax purposes.

1) Uchtmann says of a cash rent lease: “Technically, for purposes of certain farm program payments, a lease is a “cash lease” if it “ provides for only a guaranteed sum certain cash payment, or a fixed quantity of the crop (for example, cash, pounds, or bushels per acre).” If the lease is technically a “cash lease”, the operator must receive 100% of the program payments (landowner is not eligible).” Again, a cash lease is a fixed amount of cash or a fixed amount of a commodity, and the operator received all of the USDA payments.

2) Uchtmann says of a share rent lease: “As a practical matter, a “share lease” (for purposes of program payments) is probably any lease that is not a “cash lease” as previously defined. In a “share lease” situation certain program payments must be divided between the farm operator and the landlord (neither the landlord nor the tenant can receive 100% of the payment).” Again, a share lease does not fit into the cash lease definition, and both operator and landlord can share in the farm program payments.

The problem arises when there is a cash rent situation, and the landowner receives an additional payment from a share of the farm program payments. The lease may say cash rent. The farm manager may say it is cash rent. But the addition of a farm program payment converts the true cash lease into a hybrid share lease, and the Farm Service Agency says that rules violation may require a reimbursement of past farm program payments. Chances are, you would prefer not to do that.

Summary:
While you are cleaning up business from 2006 and preparing for a new and exciting marketing year, with the potential for additional profits, consider sharing some of the financial benefits with a cash rent landlord, if your current agreement does not allow them to benefit from the higher market prices. The reason is to create a friendlier relationship with a landlord that could convert into your long term tenure on the land. Additionally, ensuring that your current cash or crop share arrangement is in compliance with Farm Service Agency definitions of cash rent and crop share leases, will prevent financial difficulties if your lease is later found to be in violation.