Which Farm Lease Agreement is Right for You?

In this blog, we discuss the different types of farmland lease agreements and the pros and cons of each type of lease. No two (2) leases are alike and it’s important to identify your goals for the land or farm you own, including financial goals and ensuring the fertility and topsoil are maintained and built upon.

With a farm manager on your side, handle the details of leases, maintaining topsoils, building fertility and more can ensure your farmland investments and wealth building plans for you and your heirs are upheld.

To begin, there are several types of farmland cash lease agreements, each with its own terms and conditions. It’s important to note that many people prefer the simplicity of cash rent, while others enjoy the potential upside of a flex or bonus payment lease.

Cash Rent Lease: In a cash rent lease, the tenant pays a fixed amount of money to the landlord for the use of the farmland. This type of lease is the most common and straightforward. The tenant pays rent the rent in either two (2) installments in Spring and Fall or in some cases the entire rent is paid upfront or at the end of the crop season. With a farmland cash lease, the landlord does not participate in the crop production and the tenant farmer is responsible for all costs associated with farming the land, including seeds, fertilizers, and machinery.

Flexible Cash Lease: A flexible cash lease allows the landlord and tenant to adjust the rent payment based on changes in crop prices and yields. For instance, if crop prices are high, the rent payment may increase, and if crop prices are low, the rent payment may decrease. A flex lease has the advantage of allowing the landlord and tenant to share the risk of crop production while also providing flexibility in rent payment. However, it may be more difficult to determine the appropriate rent payment, and it may require more record-keeping and communication between the landlord and tenant.

• In some areas where farmers grow seed beans for production or can grow waxy corn for example, flex bonuses may add a significant amount of bonus income to a farmland owner. The farmer gets a bonus per bushel at either the elevator or production plant for these types of specialty crops.

“Having a farm manager assist with farmland leases and improvements can add value by providing expertise in negotiating and drafting leases that benefit both parties, ensuring that the farmland is used efficiently and sustainably, and identifying opportunities for improvements that can increase the value of the property. A farm manager can also help with risk management and compliance with regulations, which can reduce the potential for legal and financial problems.”

Custom Farming: In a custom farming agreement, the tenant provides farming services to the landlord in exchange for payment. The tenant typically provides all of the equipment, labor, and management, and the landlord provides the farmland while paying the tenant for their agricultural services.

Crop Share Lease: In a crop share lease, the landlord and tenant share the crop production and risk. The landlord typically receives a percentage of the crop produced as rent payment, while the tenant provides labor, equipment, and management. The crop share lease can be divided into different types, such as a one-third, two-thirds, or fifty-fifty share. Crop share agreements are different from leases in that the landlord shares in the crop production and risk.

• Straight Crop Share: The landlord and tenant share the crop production and expenses equally 50/50. In this agreement, the landlord and tenant split the crop production and expenses equally.
• Flexible Crop Share: The landlord and tenant share the crop production and expenses in proportion to the percentage of the crop produced. This type of agreement varies the crop share based on factors such as crop prices, yields, or other factors.
• Modified Crop Share: The landlord and tenant share the crop production and expenses in a fixed ratio, such as two-thirds and one-third. In many cases the landlord in this type of lease arrangement may only pay for grain drying and/or trucking.

Five Tips to Rent or Lease More Farm Ground

Communication = Trust

No matter if you are a landlord or tenant of a farm in Indiana, one of the best ways to negotiate a mutually beneficial lease and long term success in farming is regular communication. Address concerns when they happen, learn what the landowner values in a tenant and in the health or productivity of their soils and you’re putting together a recipe for great returns to both parties.

Values & Goals

If a landowner values good agronomics, no-till or cover crops, it’s best to address these needs up front. If you can help improve soil quality during the term of a lease or cash rent agreement, this is a great way to negotiate longer terms that are mutually beneficial. Think Win-Win, no matter who your landlord is or what they believe is most important to their land assets.

References & Resumes

With more and more absentee landowners in Indiana, having a great resume and set of references can mean the difference in your bottom line. Take the time to prepare a resume that includes your experience, education/degrees, how you approach soil health & fertility and what makes you a sound choice as a tenant and producer. It’s been said that the devil is in the details.

Land is Your Greatest Asset

For both the landowner and the tenant, it’s vital to think long-term about productivity, soil health and nutrients. Best practices = great profits for both parties. Take a look at the most successful farmers & producers in your area and think about why they are leasing more ground. Are they using variable rate technology? Do they practices good crop rotation? How have they improved the soil? Your answers to these questions can help you build a great landlord/tenant relationship that results in higher profits for both parties.

What’s the Going Rent Rate?

Avoid the coffee shop talk. The ground you own, or lease has its own unique characteristics in both soil type, history and current or planned investments. Just because a farm in the same county gets $500 / acre does not mean your farmland is worth the same. Factor in the size, shape, ease of use & ability to get large equipment there, travel time, location, point rows, drainage, commodity prices, input costs….just to name a few!

No matter what type of lease you prefer, from cash rent leases to more complex flexible leases, sharecropping or 50/50, it’s really about understanding landowner and tenant needs and goals. If you aren’t able to meet each other’s expectations, then chances are the relationship may suffer and the lease will expire. On the other hand, if you have share common values , you’re most likely on the right track to helping each other be successful and profitable this year and many more.

In today’s farm and land leases it is becoming more common to include provisions for the ownership of farm data. Landlords should take this into consideration to get a better handle on the productivity and fertility of their land. Long term, it is always best to improve soil health as many leases include provisions for “flex bonus payments” when bumper crops or prices are favorable.

For more information on farmland management in Indiana and Illinois visit our guide to management page.