WEST LAFAYETTE, Ind. — Increases in corn and soybean demand, commodity prices, variability and risks create a complicated situation for landowners and tenants trying to reach a fair agreement.

“It is important to look at each case individually because there is so much variability in this new economic environment,” said Craig Dobbins, a Purdue Extension specialist. “It’s difficult to make blanket statements about what rents ought to be.”

A Purdue survey found that Indiana land rental rates were up about 10 percent from 2006, to between $110 and $171 per acre depending on land quality. Rex Schrader, president of Schrader Real Estate and Auction Co., reports even higher rates - $125-$225 for non-irrigated land and $250-$350 for irrigated land.

“While farmers have little control over crop prices or rising production costs, they can take steps to minimize their margin risk,” said Mike Boehlje, a Purdue agricultural economist.

In addition to stressing the need to take a hard look at crop insurance products and forward pricing, he urged farmers to carefully negotiate their land leases.

“We need to make sure we don’t overbid the cash rent market so that we don’t bid our cost structure up into a position we can’t support,” he said. “If we lock in high rents for 2008 and then find that crop prices aren’t quite as good in 2009, trying to adjust those rents back down is difficult.”

Boehlje suggested farmers consider land lease arrangements that both protect them and provide their landowners fair compensation. “We might think about using what is called flexible cash rent,” he said. “That’s where you pay a base rent and then a bonus or an option payment. The option payment is a function of how strong prices are and how good yields are.

“Say we maybe pay a $140 base cash rent and then the option payment on top of that could be $50 or $60 if we have really strong prices and yields - or the option payment could be only $10 if we don’t have as good a price or yields. This gives more flexibility to have that rental payment adjust to the changing economic conditions.”

When Extension ag economic experts Luc Valentin, Alan Miller and Craig Dobbins sat down to work through information for parties involved in rethinking and renegotiating lease arrangements, Valentin broke down the different types of lease arrangements by landowner and tenant from least risky to most risky.

Landowner’s perspective

“From a landowners’ perspective, a cash rent agreement has no risk, but the landowner should also expect the lowest return from the agreement,” he said.

Conversely, in a share-lease agreement, the risk for the landowner is higher so the expected return also should be higher. This is where Boehlje’s flexible cash rent could be utilized.

From the tenant’s perspective, cash rent agreements are the riskiest. A tenant has to pay the same rent in years where yields and prices are good and also in years where both prices and yields are low. With a share rent, the risk is split with the landlord, as well as the returns.

The share rent is the least risky agreement, but also the one with the lowest expected return.

For the tenant, a flexible cash lease provides a situation where the base rent is not as high in a year of low prices, but when revenues are larger because of higher than expected yields and prices, the tenant would pay a higher rent, Valentin explained.

With cash rents varying, landowners and tenants want to know what amount of rent is appropriate.

“Think about the relationship of rents to land value,” Dobbins said. “Given the current environment, three to four percent of the current land value is a reasonable area for rents to be in. It also helps to think about farm productivity measured by long-term corn yields. Rent set at 95 cents to $1.10 per bushel is a reasonable rate based on the last five or six years of corn yields.”

Alan Miller said tenants need to be proactive in managing their relationship with the owner. “Talk to the landowner about what is happening in the market,” he said. “Tell them what you are thinking about doing and how this would affect them. Ask for their ideas and show interest in coming to an agreement where both parties are happy.”