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Evaluating Variable Cash Rents in Agriculture: Balancing Risk and Returns

This document explores the transition from traditional share leases to variable cash rents in agriculture, highlighting the motivations and concerns of both landowners and operators. With rising price volatility and variability in farm returns since 2006, a robust framework for determining gross revenue and setting rent factors is essential. We present examples of different variable rent structures, illustrating how they offer similar returns to traditional cash rents while mitigating risk. Ultimately, variable cash rent may present a solution for farmers seeking to navigate market fluctuations.

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Evaluating Variable Cash Rents in Agriculture: Balancing Risk and Returns

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  1. Variable Cash Rents:Types and Evaluation Gary Schnitkey and Ryan Batts University of Illinois

  2. Motivation • General movement from share (the “perfect” risk sharing lease) to cash rent • Land owners view share leases as complex • Land owners concerned with cash flow • Operators concerned with co-mingled grain • Stickiness of 50-50 while land owners demanding a higher share (some modified share leases with additional rent) • Since 2006, difficulty in setting cash rent: • Higher returns to split between land owner and operatr • Higher price volatility • Higher year-to-year variability in farm returns

  3. Type: Variable Rent with Bonus Example 1: Gross revenue = $380 Rent = Minimum = $160 Example 2: Gross revenue = $600 Rent = $250 = $160 minimum + ($600 gross - $450 Base) x .45

  4. Type: Percent of Crop Revenue Example 1: Crop revenue = $380 Rent = $160 max($160,$133 = 380 x .36) Example 2: Crop revenue = $600 Rent = $216 = max($160, $216 = $600 x .36)

  5. Determining Gross Revenue • Gross Revenue = Yield x Price • Yield options: • Farm yield • Expected county yields • Prices (What and timing): • Alternatives • Local delivery point • Future prices * • Crop insurance (base, harvest) * • Timing and collection • Suggest getting through spring and harvest * Will impact rent factor level

  6. Setting Rent Factor • Cash rent / crop rev have averaged 30 % to 35% over time • Setting a rent $10 below average and varying does not reduce risk • For bonus rents, having a low base rent, a high base revenue and a high rent factor reduces risk

  7. Farm Rent Evaluator • Evaluates alternative leases including share rent, cash rent, and variable leases • For download from FAST section offarmdoc(www.farmdoc.illinois.edu)

  8. Variable rents give essentially the same return as cash rent, with lower risk

  9. Summary • Variable cash rent is a way of reducing risk to farmer • Variable rents with “high” minimums do not reduce risk • Will not counter changing input costs • Still not as risk sharing as a share rent lease

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