Throughout the year, I receive calls from both producers and landowners on what is a fair rent for either the land owned or what is being leased. The commonality in these calls is they want to either receive a fair rent or pay a fair rent. In this article, I will discuss crop share leases.
Most times when we talk about a fair rent, we really mean a fair and equitable rent that is based on the equity contributions that both parties are willing to make in this rental arrangement. For a landowner who is interested in generating a higher rent than the going local cash rent and who is willing to take on some risks, a crop share lease should be explored.
Generally speaking, cash rent with essentially little risk should not generate more than an equitable crop share rent that has some production and price risk. A crop share lease also allows the producer or tenant to share in some of the risks with the landowner.
Let’s review a paragraph from my previous article on cash leases, as it applies even more so to share leases: “The two parties involved in the lease must select the type lease, which is best suited to their situation. Both landowner and producer must determine what contributions of labor, capital and management skill they are able and willing to provide. They must also decide what production and price risks each party will bear. Making these determinations will give a general indication of the type of agreement which best fits.”
Lease rewards both parties in proportion
The most effective crop share lease will be structured to reward both parties in proportion to the value of contributions provided. Five important principles to follow in a crop share lease agreement are:
- Variable expenses that are yield increasing should be shared in the same percentage as the crop share.
- As new technologies are adopted, share arrangements need to be adjusted to reflect their impact on costs and returns. Local customs or share rent agreements must be evaluated for relevancy as the cost structure of production agriculture changes.
- Both parties should share in total returns in the same proportion as they contribute resources.
- Tenants and/or landowners should be compensated at the termination of the lease for the unexhausted portion of long-term investments. For example, lime applied to cropland usually lasts several years. If the tenant pays for the lime, then the lease should provide for a method of calculating the payment to the tenant for the unused portion of the lime if the lease is terminated before the total value of the lime is recovered. Capital expenses for irrigation and or land maintenance can also be structured in this manner.
- Communication must be maintained between landowner and tenant. If the lease does not follow the first four leasing principles, the farming operation may not produce at maximum economic efficiency, or one party may gain at the expense of the other. However, strict adherence to these first four principles cannot guarantee success, particularly if adequate management and effective communication between landowner and tenant are not used.
This is really just the tip of the iceberg when discussing crop share lease. For more detailed information including a worksheet that applies the above principles, visit the Univeristy of Tennessee Farmland Legacy website and click on Crop-Share Leasing for UT Extension Publication PB 1816-E Crop-Share Leases. The worksheet can provide answers to the questions – How should the crop be shared between landowner and tenant? How should the cost of shared inputs be divided between the landowner and tenant?
If equity considerations are important, the contribution approach to lease development should be studied. Breaking the bonds of tradition is not always easy, but is justified in many instances. Modern agriculture demands the use of up-to-date production methods and farm leasing principles.
Editor’s note: Watch for Danehower’s third article in this series in a few weeks, which will take a look at the flexible rent lease, or what is a combination of the cash and crop share leases. He is a farm management specialist with UT Extension and located in Ripley, Tenn.