Pick the Right Farm Lease Agreement for Your Operation. Here’s How
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If you lease the land you farm, you're in good company. In many U.S. states, especially the Grain Belt of the Midwest, more than half of the land farmers have under cultivation is leased. Your lease agreement is a foundational piece of making a profit and growing your business season after season.
Whether you’re leasing farmland to grow soybeans and corn or wheat and hay, there are many lease agreement options to consider, from simple fixed cash leases to crop share agreements. Which type of lease agreement would be the most favorable for your operation? We’ll take a close look at each type of lease and weigh their advantages and challenges. Consider consulting with a real estate attorney with ag experience before signing a lease. Start with your state bar association to find knowledgeable ag real estate attorneys.
4 Types of farm lease agreements
Even if you’re leasing farmland from family, understand that a formal, written farm lease agreement is critical. Your farm lease agreement is a legal document that outlines how you and your landlord will combine resources (land, capital, or labor) to produce a commodity. Your lease agreement protects the interests of both you and the landowner and generally also offers methods for resolving disputes.
The type of farm lease agreement you use will depend to a large degree on your geographic location, what type of commodities you produce, and your risk tolerance.
1. Fixed cash lease
Under the simplest type of farm lease agreement—the fixed cash lease—you pay the landlord a designated amount of cash per acre, per year to use his or her farmland. The lease might also include restrictions on what you can grow, types of tillage, and pest control practices you can use, as well as any conservation efforts you must practice. If your farm operation receives any USDA commodity program payments, those funds will all go to you as tenant.
There are many advantages to a fixed cash lease. They’re the simplest form of lease agreement, making your record-keeping easier, especially if you’re renting farmland from multiple landlords. A fixed cash lease also gives you the greatest control over making day-to-day operational decisions.
However, as a tenant in a fixed cash lease agreement, you bear all the operational risks. That means you have to be incredibly careful when negotiating a fair cash rental rate, accounting for the possibility production costs might be higher than you anticipate or commodity prices much lower.
2. Flexible cash lease
A flexible cash lease is similar to a fixed cash lease agreement in that you pay the landlord on a per-acre, per-year basis. However, with this option, the rent you pay depends on your crop yields and/or the selling prices of your commodity during that lease year. In this scenario, you do not bear the risk of low yields and prices alone; you share them with your landlord. This means that he or she will also enjoy the benefits of higher-than-anticipated yields or profits.
If you adopt a flexible cash farm lease agreement, you may also want to include terms that account for crop input costs when determining the rent you pay. Your landlord will likely share in paying the premiums for crop insurance. There are a variety of ways to formulate a flexible cash lease agreement, including one that involves a base rent plus bonus and one based entirely on shared revenue.
While a flexible cash lease allows you to share some of your farming risk with the landowner, it still has potential pitfalls. For example, should your crop yields be low while commodity prices are high, a flexible cash lease where rent prices are based on only price could leave you, as a tenant, in the lurch.
Consider formulating a flexible cash farm lease agreement that takes into account both crop yields and prices. Your attorney may be a good source to help with this, but a local extension agent can help you pin down the best options for your individual situation and guide you through ways to determine what your actual yields and revenue are.
In this scenario, you do not bear the risk of low yields and prices alone; you share them with your landlord. This means that he or she will also enjoy the benefits of higher-than-anticipated yields or profits.
Flexible cash leases can be more complex to negotiate, but the advantage is that once you and your landlord come to terms on a formula for determining yields and prices, you can likely use that same formula from one year to the next with your cash rents automatically adjusting based on yield and price changes. Thus, a flexible cash lease might reduce the need to renegotiate your lease agreement every year as you would with a fixed cash lease.
3. Crop share lease
Another farm lease agreement that provides for shared risk between you and the landowner is the crop share lease. In this scenario, the landowner receives a share of the crop (and any USDA payments) in exchange for your use of his or her farmland resources. In the United States, nearly 20% of farmland leases are crop share leases.
Crop share percentages vary widely depending on your geographic location and the crops you’re growing. In Iowa, for example, corn and soybean crop share agreements typically allow for a 50–50 split. But if you operate in a region where farmland values are low, the landowner’s percentage of crop share might be substantially less.
If you adopt a crop share lease agreement, be sure you consider the use of any of the landowner’s buildings or storage facilities. He or she may want a separate rent payment for those resources.
In a crop share agreement, the landowner typically pays half the costs of your inputs, including seed, fertilizer and any pesticides you use. Your landlord will also generally be responsible for drying, storing, and selling his or her share of the crop. Keep in mind you’ll be fully responsible for labor, fuel, and equipment costs.
Like a flexible cash lease agreement, a crop share lease allows you to share risk with the landowner. It also gives your landlord an incentive to share the expense of adopting technologies or innovations that could increase yields.
But a crop share agreement also requires a lot more collaboration and negotiation between you and the landowner, almost as if you are business partners. It’s probably a type of farm lease agreement you’ll only want to consider if you have a solid, mutually respectful working relationship with your landlord. This is why crop share leases tend to be more common among family members where, for example, an adult child might be conducting operations on farmland owned by a parent.
4. Custom farming contract
While a custom farming contract isn’t really a farm lease agreement at all, it does offer another avenue for farmers to obtain revenue from use of their equipment and labor.
With a custom farming contract, you will supply all the labor and equipment to till, plant, fertilize, manage, and harvest crops for a landowner. The landowner pays all other expenses and receives the entirety of the crop you harvest, as well as any payments from the USDA. In exchange, you’ll get a fixed payment per acre or perhaps a fixed payment for every operation you perform with your equipment.
The biggest advantage of a custom farming contract, as with a fixed cash lease, is simplicity. Only one party is responsible for production and marketing decisions, and you have very little financial risk compared to the landowner. However, before signing a custom farming contract, assess whether you can manage the expectations of multiple landowners—if you have more than one such contract—as well as the needs of your own farming operations.
The biggest advantage of a custom farming contract, as with a fixed cash lease, is simplicity. Only one party is responsible for production and marketing decisions, and you have very little financial risk compared to the landowner.
There are many variations on a custom farming contract worth considering. For example, you might negotiate to receive bonus payments for meeting certain yield goals or to receive a percentage of the harvested crop in place of cash payments.
Farm lease agreement checklist
As you begin negotiating your next farm lease agreement, regardless of whether you adopt a simple fixed cash lease or a more complex crop sharing agreement, consider including these critical components of any farmland lease contract:
- Lease terms. How long will the lease last? A year? Several years? Get it in writing, as a verbal agreement is only enforceable under law for a single year. What’s the renewal clause?
- Allowable land uses. Does your landlord have conservation practices he or she expects you to respect and/or continue? What about allowed chemical applications, protection of waterways, and creation of buffer zones? Address all of these items in the lease, where appropriate.
- Rights and obligations. What responsibilities do you and the landowner have for maintaining insurance and paying for utility costs? What happens if the landowner dies during the lease term and ownership of the farm transfers to multiple adult children? Does the landowner have the right to inspect your operations? By including these items in your lease agreement, you’ll reduce the likelihood of disputes down the road.
- Repairs, maintenance, and improvement costs. Who is responsible for needed repairs to gates and fencing? What about the maintenance of entry roadways, cleanup from storm damage, or improvement of grain storage buildings? Make sure your farm lease agreement clearly outlines whether you or the landowner is financially responsible for farm maintenance and/or damages.
- Termination and default. What happens if you and your landlord have irreconcilable differences? What if you fail to pay your rent? What if the landowner goes bankrupt? It’s always a good idea to be prepared for the worst by determining ahead of time what will happen if one party defaults on the agreement or what circumstances might result in lease termination and how much notice must be given.
Still not sure what type of farm lease agreement is best for your situation? Evaluate the risks and benefits using this downloadable lease comparison chart from Iowa State University Extension and Outreach.
The information provided herein is provided gratis, and solely as reference. The information is not intended to be, nor shall it be a farmer’s sole and exclusive source of information on the subject matter. Corteva Agriscience makes no warranty, or other representation, express or implied, as to the accuracy of any information contained herein, and cannot assume responsibility or liability for reliance on or use of this information by any farmer in making specific decisions on farmland leasing, which in all cases is the responsibility of the farmer.