Episode Details

Improving Your Farm Lease Contract

A guide to understanding the business of farmland leases

Importance of Leasing

More than half of Iowa’s farmland is rented to tenant operators. 

The trend over the past several decades has been for more of Iowa’s farmland to be leased rather than operated by its owners. In many cases, retired farmers or their heirs wish to continue to own farms, but do not want to operate them. 

Leasing farmland involves a business agreement between the owner and the operator. 

Reasons for Farm Leases

Land is an expensive resource. A large capital investment is required to purchase enough land to provide the farm family an opportunity to earn a satisfactory living. 

Many individuals or institutions that own land are looking for someone to farm it to provide a return on their investment as well as maintain its productivity. 

Common Types of Leases

The four most common types of leases used in Iowa are the fixed cash lease, the flexible cash lease, the crop share lease, and the custom farming contract. The common terms of these leases are described below.

Fixed Cash Lease
Under a fixed cash lease the tenant pays a given amount of cash rent per acre per year for the use of the farm resources. The tenant has a free rein in planning the crop and livestock production program on the farm unit, and receives all the crop and any associated USDA commodity program payments.

Flexible Cash Lease
A variation of the fixed cash lease is a flexible lease, in which the actual rent to be paid depends on the actual yields attained and/or the selling prices available during the lease period. This ensures that the rent paid is in line with the profitability of the crops grown that year..

Crop Share Lease
The distinguishing characteristic of a crop share lease is that the owner receives a share of the crop and USDA payments as a return for the land resources used. 

The owner normally furnishes land and buildings and pays half of the costs of inputs such as fertilizer, seed, and pesticides when the crop is divided 50-50. Owners are usually responsible for drying, storing, and marketing their share of the crop, as well. The tenant usually furnishes all the labor, fuel, equipment, and the other half of the shared expenses. 

Custom Farming Contract
Under a custom farming contract the operator supplies all the labor and equipment needed to perform tillage, planting, pest control, harvesting and moving of crops to storage. The landowner pays all other expenses, and receives all the crop and any USDA payments. The custom operator receives a fixed payment per acre from the owner, or a fixed payment for each operation performed.

Advantages and Disadvantages of Different Types of Leases

All types of leases have advantages and disadvantages to each party. The tenant and owner should consider this before choosing the type of lease and the terms that should be incorporated in it.

Fixed Cash Lease
Advantages of a fixed cash lease:

• The lease is simple with relatively few chances for misunderstanding.
• The owner is relieved of making day-to-day operating decisions.
• The owner has very little financial risk.
• The tenant has maximum freedom in planning and developing the cropping and livestock programs.
• The tenant has fewer records to keep when multiple landlords are involved.

Disadvantages and potential problems of the fixed cash lease:

• A fair cash rental rate may have to be renegotiated each year.
• Cash rents are likely to be too low in times of rising prices and increasing yields, and too high in times of low prices or low yields.
• Selling prices and production costs may be higher or lower than anticipated