The difference between success and failure in business is how well that business is able to manage risk. This special issue of The Progressive Farmer provides ideas for managing risk in one of the most volatile times ever in agriculture.

How to Write a Better Flex Cash Lease
Variable cash rents offer a fairer way to split the risks and rewards between landowners and renters, but be sure to check lease terms with the Farm Service Agency. Here's how to avoid a hassle when you set your yield and price bonus triggers.
By Elizabeth Williams, DTN Special Correspondent

That generosity convinced the landlord to sign a flex lease for Groth's 2008 season. "It worked out well for both of us," said Groth who raises corn, soybeans, wheat and alfalfa in Winchester, Ind.

Groth likes to use three-year to five-year leases, and flex leases allow him to reward the landowner in good years without having to negotiate cash terms every year, or lock in a high rent if prices collapse. While variable cash terms have been rare in the past, 17 percent of more than 300 farmers surveyed by DTN in August expected to use flex cash leases in 2009 (see online table).

Before negotiating a flex lease with your landlord, be sure it complies with Farm Service Agency (FSA) regulations. A flex lease based on your own production or crop price you actually receive is construed by FSA to be a share lease and therefore you have to share your Direct Payment with your landlord. Tenants with flex leases have handled this in two ways:

1. Rather than base the flex payment on that farm's production, use the average county yield and an average price at a local elevator or Posted County Price. FSA categorizes such a lease as a cash lease. (The notice from FSA regarding flexible cash leases can be viewed at www.fsa.usda.gov/Internet/FSA_Notice/dcp_172.pdf or from any county FSA office.)

Iowa State University gives this example: Base Cash Rent is $200 per acre. The flex payment is triggered when corn gross revenue exceeds $800 per acre. If the county average yield and posted county price for fall 2009 is above the trigger, the landlord will receive 35 percent of the excess amount.

Let's say the fall 2009 price is $6 per bushel and the county average yield is 170 bushels per acre, the gross revenue of $1,020 is $220 above the trigger ($800). The bonus rent of 35 percent of that would be a flex payment of $77. So, total rent would be $277 per acre.

2. Have the county FSA committee approve your flex lease (based on your farm's production) with a low percent of risk by the landowner. "Often the flex leases we present to the local committee are determined to be a 99 percent share of the risk by the tenant and 1 percent share by the landowner," says Howard Halderman with Halderman Farm Management in Wabash, Ind.

However, "with only a nominal potential payment from USDA, the landlord could decline the payment and not have to fill out any paperwork to determine eligibility," explains attorney Bill Penn of Williamston, Mich., who specializes in farm program and payment limitation issues.

This will become a more important factor for the 2009 program because FSA will require payment recipients to submit their tax information so the agency can determine farm adjusted gross income and non-farm adjusted gross income for payment eligibility, Penn said. Some landowners may not want to submit their tax records to the local FSA office.

"We have 15 different ways to figure flex leases," said farm manager Halderman. "Most landowners prefer a high guarantee with a smaller flex. If the cash lease market runs between $150 to $200 per acre, we may set up a flex lease with a guarantee cash base of $175 with the potential of going up another $25 or more on the flex portion." So, if the farm operator has a bad year, he won't be hung up for the extra bonus.

In its 2008 flexible cash lease example, Iowa State University used a cash guarantee of $180 per acre and a gross corn revenue trigger of $500 per acre (or $400 per acre gross soybean revenue). However, in Iowa State's 2009 flex cash lease example, the base cash rent is $200 per acre and the corn gross revenue trigger is $800 per acre.

"That's to cushion escalating costs if you are writing a four-year lease," said Iowa State Extension farm management specialist Steve Johnson.

To figure your base gross revenue trigger, "you add in all your total cost of production, including your guarantee cash rent and a nominal profit, for example $25 per acre return on management. Above that you'd be willing to share your profits with the landowner," explained Halderman.

Iowa State's Johnson prefers flex leases on the more productive ground, and always with a payment cap. "With no cap, the tenant will not know their cost of production and have a comfort level in forward pricing bushels in order to make an unknown flex payment. This was witnessed in 2008. Tenants described to me not forward pricing $7 per bushel new crop corn, because if corn then went to $10 per bushel on normal yields, they couldn't afford the flex payment," reported Johnson.

Flex leases require other administrative decisions as well. Do you use a county posted price or a local elevator price? Do you use a one-month average price, such as December, or do you use a season- or year-long average? Depending on how you want FSA to categorize your lease, do you use your yields or county average yields? Do you pay all your cash guarantee up front or split it into two payments? When is your flex payment made?

"It sounds more complicated than it really is," said Groth. "You just have to figure out a formula that works for you and your landowner. I've written flex leases three different ways this year. We'll see which one works the best."

For more variable cash rent samples, go to http://www.extension.iastate.edu/agdm.