3 months, 2 weeks ago From Farmers National
Farmland owners in Illinois are struggling to determine fair yet profitable cash rent levels for their operations as they move into 2014
The use of variable cash rents is at an all-time high thanks to current
commodity market volatility. Farmland owners in Illinois are struggling to
determine fair yet profitable cash rent levels for their operations as they
move into 2014.
Variable rate cash rents, which provide market performance flexibility, have
become more prevalent due to fluctuations, according to Farmers National
Company, the largest farm management and farmland real estate company in the
country. The deadline to terminate current leases in Illinois is prior to
Local farm management experts from Farmers National Company estimate 50
percent of farmland cash rent agreements in Illinois now use variable
leases. Many local operators and land owners are finding this option
provides the best scenario for achieving results for each party.
It has been a challenge for most landowners to determine fair rent levels
within the current market. Conditions have changed so rapidly over the last
couple of years that many landowners find themselves 20 to 40 percent below
market on current lease terms with no real idea what the lease terms should
be for 2014 and beyond, says Jim Farrell, president of Farmers National
Traditional cash rent agreements do not respond well to a volatile market
Farrell said. As a result, more land owners and farm operators are opting
for the flexible agreements that adjust and respond to upswings or
In contrast to last year, the market is anticipating a possible decline in
crop prices for the fall, which could be a game-changer. “Farm operators
want to have some remediation for high cash rents in the event of a crop
failure or dropping commodity prices,” said Farrell. “Like no other time in
recent farm history, variable rate cash rents have now become very popular.
They allow the farm operator and the landowner to arrive at a base rent, and
factor in a plus rent arrangement if things go very well during the crop
A variable cash rent lease is composed of a guaranteed base amount, along
with a potential flex payment addition prompted by higher gross revenue.
“Flexible leases can be of benefit to both the land owner and farm operator
as they provide the ability to adjust and react to the market,” said Dennis
D. Hoyt, area vice president at Farmers National Company. "It eliminates
some of the concerns over the timing of establishing a base rent and can
respond to the unprecedented volatility in the marketplace.”
Landowners often rely on the farm operator to help determine a fair rent and
even what type of rental arrangement to use, according to Farrell.
Landowners now have a wider range of choices to consider when they formulate
how to best manage their income-producing asset.
In addition to a standard variable cash lease, there are also several
variations including cash rent plus and share crop leases. Landowners have
more options to consider and analyze to maximize the return on investment
for themselves and the farm operator. According to Farrell, for landowners
considering a change in lease terms, it is important to terminate any
current lease in writing prior to state deadlines.
“Reviewing a lease has never been more important, especially with the income
that farms can generate today,” said Farrell. “Landowners we work with ask
us for advice on the optimum lease option for their situations, as well as
cash rent level trends to determine a fair number. They want to know what is
fair for land in their area, as well as the impact land values might have.”