October 25, 2024 • 32 mins
Join Purdue ag economists Michael Langemeier, Todd Kuethe, and James Mintert as they discuss farmland rental agreements, with a focus on flexible cash rent leases versus traditional cash rental and crop share arrangements. They combine their comparison of cropland flex leases to cash rental agreements with insights from the 2024 Purdue Farmland and Cash Rental Rate Survey. The discussion covers cash rental trends in west central Indiana, the economic factors influencing changes in rental rates, and the relationship between net returns to land and cash rental rates. They also discuss the benefits and challenges associated with flex leases, emphasizing the importance of clear agreements. The episode also provides an update on Indiana farmland values and points listeners to the array of farmland leasing resources available on the Purdue Center for Commercial Agriculture's website.
Podcast provided by Purdue University's Center for Commercial Agriculture. Slides and the transcript from the discussion can be found at https://purdue.ag/agcast177.
You can find the FULL video episode on our YouTube channel. Visit https://youtu.be/87bpXxTwm58 to subscribe and watch.
For additional resources and publications on leasing, visit: https://purdue.ag/leasingland. The full August Purdue Agricultural Economics Report with 2024 survey results for farmland values and cash rental rates can be found by visiting: https://purdue.ag/paer.
To learn more about Indiana's 2024 farmland values, listen episode 173 for an in-depth understanding of trends, market dynamics, and future expectations for farmland values with professors Kuethe, Langemeier and Mintert: https://purdue.ag/agcast173 And learn more about Indiana's 2024 farmland cash rental rates by listening to episode 174: https://purdue.ag/agcast174
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
James Mintert (00:06):
Thanks for joining us for our
Purdue Commercial AgCastpodcast, which is the
Purdue Center for CommercialAgriculture's podcast
featuring farm managementnews and information.
Joining me today aremy colleagues, Dr.
Michael Langemeier who's aprofessor of ag economics
and the associate directorof the Center for Commercial
Agriculture, and Dr.
Todd Kuethe who's a professorof ag economics and holds
the Schrader Endowed Chairin Farmland Economics
(00:27):
here in the Department ofAg Economics at Purdue.
We're going to spend thenext 30 minutes or so talking
about the comparison ofcropland flex leases to
cash rental agreements.
And that's a topic that'sreally interest to a lot of
people here in the fall of2024, especially given the
downturn that we've seenwith respect to crop prices.
(00:48):
So Todd, I want to start offthough talking a little bit
about the Purdue Farmlandand Cash Rental Rate Survey
that you conduct everyyear on behalf of Purdue.
Tell us a little bit aboutthat because we're going to
use some of the data fromthat survey when we're making
this comparison between flexleases and cash rental rates.
Todd Kuethe (01:05):
Yeah, so it's, it's a great place
to sort of start any kindof base discussion about
cash rent and we've donethe survey as a department
going back to the mid 1970s.
Every June we survey peoplewho interact with the
farmland market as part oftheir professional lives.
So we have a lot of appraisersand brokers and farm managers
(01:26):
and some lenders in there aswell, asking them about the
land market in their area.
We ask about, both land valuesand cash rents, and we ask in
their market area for the topaverage and poor, which we
don't define those for them.
We just ask them to reporttheir expectation for long
run corn yields in that area.
Then we get all thatinformation and we assemble
(01:47):
it, uh, at both the statelevel and then for six
regions around the state.
We report cash rentalrates for top, average,
and poor quality land.
James Mintert (01:57):
So as you look at it, the key there
in terms of productivityis thinking about corn
yields and using that andin that way, you can kind
of equate it back on a perbushel basis, whether you're
looking at farmland valuesor crash rental rates, right?
Todd Kuethe (02:10):
Yeah, correct.
So the idea is to be ableto put it in sort of, you
know, uh, for each bushel youyield, this is what people
are willing to pay in eitherland values or cash rent.
Um, and because, you know,high quality land is different
in one part of the stateversus the other, right?
And, and generally it's bestto, I find, uh, uh, we're
interviewing experts or askingexperts for their opinions.
(02:31):
So, um, just kindof let them tell us.
They do a better jobthan us trying to give
some, you know, very harddefinition of this is what
definition will say for top.
James Mintert (02:38):
So let's just kind of recap what's happened
with respect to cash rentalrates in 2024 based on the
summer 2024 survey and comparethose to what we saw in 2023.
Todd Kuethe (02:50):
Yeah, so the, the big takeaway, and we
just did a podcast just onthe survey, so if anyone's
really interested, go back andlisten to a longer discussion.
The biggest takeaway isthat they're relatively
flat from the two years,uh, between '23 and '24.
We were up a little bit,at the top end and at the
average, and then down alittle bit at the poor.
For 2024, top qualityland average cash rent
(03:11):
statewide of $313, whichis a little bit higher
than $306 the year before.
Uh, for average we're at260, just a smidge higher
than 257 the year before.
And 204, which is downjust a little bit from 212.
The other thing I noticedis that, you know, people
really pay attention to sortof $25 increments, right?
So we're just above 200.
(03:31):
We're a bit above 250 anda little bit above 300.
When we think about sortof at the state level.
James Mintert (03:37):
And, you know, Michael, I think based
on some of the work you'vebeen doing over the course
of the summer, the fact thatwe actually saw a little
increase on the top qualityland and a small decrease on
the lower quality land makesa lot of sense when you were
crunching the numbers, right?
Michael Langemeier: Definitely the break even (03:51):
undefined
prices are lower for thetop quality land, and so it
makes sense that there's,there's a little bit more
room for increases there,uh, compared to the average
in the poor quality land.
James Mintert (04:01):
Yeah, and the poor quality land is the
one that's really suffering.
Michael Langemeier (04:03):
Very high break even prices.
James Mintert: Yeah, good point. (04:04):
undefined
So you've taken a look at,uh, not just the state level
averages, but you actuallyfocus a little more on west
central Indiana, and that's inpart because you've developed
a simulated case farm that'sbased on crop yields and
crop production levels herein West Central Indiana.
So you've taken a look atthe West Central Indiana
regional cropland cash rentalrates going back to 2007
(04:28):
and there's a reason whythis chart starts in 2007.
So you might start there.
Michael Langemeier (04:31):
Yeah, I call that the beginning
of the ethanol boom andand certainly things have
been different since 2007.
So just right out of the gategoing from 2007 to 2014, we
saw an increase in cash rentin west central Indiana for
average land productivity.
I'm using average here.
It was 157, in 2007,it was 291 in 2014, an
(04:53):
85 percent increase.
Uh, that's prettymuch unprecedented.
So very large increaseduring that time period.
And then as we got into 2014going into 2015 net return
to land was was weaker.
And so we saw adip in cash rent.
It bottomed out and at235, 240, 2017, 2018, 2019.
(05:13):
That's about 235 to 240.
And then since then,we've seen a little
bit of an increase.
And at 2024, it'sright at about 285.
James Mintert (05:22):
And if you think about it, the
comparison, you mentioned2007 to 2014, 85 percent
increase in cash rental rates.
From 2014 to 2024, youjust take those two
endpoints, essentiallyno change, pretty flat.
And those are in nominalterms, you adjusted for
inflation, actually, thoserental rates have come
down a little bit, right?
So, let's think a littlebit about the relationship
(05:44):
between cash rental rates,And net returns to land.
To do that, we need todefine a term that you use
a lot in your writings,which is net return to land.
What do you mean bynet return to land?
Michael Langemeier (05:55):
Okay, I want to refer back to the
Purdue Cost and Return Guide.
And if you looked at that,what we do in that guide is we
use what we call full costing,or we add cash, we add
opportunity cost to cash cost.
That's very importantto understand to get to
this net return to land.
And so, in the budget,we have variable costs.
Those are almost all, uh, cashcosts, except for interest,
(06:17):
we do charge opportunitycosts on, on interest expense.
But when you get into thefixed cost areas, when you
really start talking aboutthe opportunity cost, we
have an opportunity coston owned land, for example.
We have an opportunitycost on owned machinery.
So if you own all machinery,uh, the cost is not zero for
machinery ownership, there'san opportunity cost in there.
We have an opportunitycost in operator labor
(06:39):
and family labor.
So all of that's includedin the budget, the cash
and the opportunity cost.
And when you take grossrevenue minus all the, the
variable and fixed costs,uh, you, you come up with
what we call economic profit.
Uh, to calculate net returnto land, we take economic
profit and we add backin the land cost, whether
that be opportunity costor cash rent, uh, depending
(07:01):
on whether you own or, or,own or rent the ground.
Another way to think aboutthat is, is all costs are
included except for land.
James Mintert (07:09):
And when you say land, you mean in
the context of the budgets,these cash rates that are
collected off the survey.
Michael Langemeier (07:14):
And that makes it ideal to compare
with cash rents over time.
And when we do thiscomparison for West Central,
this would be very typicalall across the Corn Belt.
What you see is a lot ofvariability in net return to
land compared to cash rents.
And it makes a lot of senseto me because you're not going
to negotiate big changes incash rent from year to year.
(07:35):
It takes time, uh, to,to change cash rent.
And essentially, uh, what,what, what has to happen
there for cash rents to goup, uh, an extended period
of time is for net return toland to be relatively strong.
We saw that from 2007 to 2014.
We saw a large increase incash rents because net return
to land was relatively strong.
(07:55):
We also saw a dip in cashrents, uh, from '14 to '19,
uh, because net return toland was relatively soft.
And then going into2021 and 22, very strong
net return to land.
Uh, we saw some increasesin cash rent there.
It's been fairlystable since 22.
Uh, however, uh, the netreturn to land in '23 and
(08:17):
'24 is relatively low.
And so, uh, I ask could wehave a repeat of the '14
to '19 period where we haveseveral years in a row of
relatively low net return toland, which would put downward
pressure on cash rent.
James Mintert (08:30):
Yeah, so
Michael Langemeier (08:31):
And that makes this discussion of flex
rents really interesting.
James Mintert (08:34):
Yeah, so I think one of the key points is
I think about looking at thischart, Michael, is the fact
that those cash rental ratessmooth out the returns to net
returns to land effectivelyis one way to think about it.
Michael Langemeier (08:45):
Yes.
James Mintert (08:46):
So, let's talk about an alternative
to cash rent, and that's theflexible cash rent lease.
And so, talk us a littlethrough that a little bit.
Michael Langemeier (08:54):
We all know that crop prices, yields,
and costs are very uncertain.
Therefore, operators andlandlords hesitate to
commit to a fixed cash rent.
You're committing to it.
That's a prettybig commitment.
And so, we used to, it usedto be more common to have
crop share leases, uh, whereyou, you shared quite a bit
of the risk associated withgross revenue and and, uh,
and you shared some of thecost, but we've kind of
(09:16):
moved away from that becausethey were quite risky.
And so these flex leases arereally something in between.
It kind of takes some ofthe features of the fixed
cash, uh, rent lease andsome of the features of the
crop share lease and comesup with another a rental
arrangement that makes, insome cases, a lot of sense.
James Mintert (09:34):
Yeah.
So that's aninteresting perspective.
You looked at some resultsfrom a recent survey of
farm managers in Illinoiswith respect to the kinds of
leases that they were using.
And those results arekind of interesting.
Michael Langemeier (09:45):
Yeah, every year, the Illinois
Professional Farm ManagementAssociation, along with
the land appraisers,do a survey related to
leasing arrangements.
And so this is the '24results, and what they found
is about a third of theleases were crop share leases.
There were some tweaks tothose crop share leases.
Some supplementalsmodifications to a true crop
(10:06):
share lease, but about athird were crop share leases.
About a third were fixedcash rent, and about a
third were variable, whatthey call variable cash
rent, which we're callingflexible cash rent today.
Now, it's important tounderstand that this was
a survey of professionalfarm managers, uh, and,
and rural appraisers, uh,because of that, the, the
(10:26):
variable cash rent or theflex lease, was a much higher
percent than it would be ifwe just, if we just surveyed
everybody in Indiana thathad leasing arrangements.
It wouldn't be a third, uh,that have flexible leases.
James Mintert (10:37):
Yeah, if we did survey everyone, we would
expect to see a much higherpercentage just on fixed cash.
Michael Langemeier: Fixed cash rent. (10:42):
undefined
James Mintert (10:43):
With some residual maybe on
the, on the crop share.
Because the crop shareleasing has definitely
been on decline.
Michael Langemeier: Definitely declined. (10:49):
undefined
James Mintert (10:50):
Over the last several decades.
So, let's talk briefly aboutsome of the advantages of
flexible cash rent leases, andwe'll also talk about a couple
of disadvantages as well.
Michael Langemeier (10:59):
Yeah, if you, if you look at it from
the landlord's perspective,and then we'll talk about
the operator's perspective.
From the land, landowner'sperspective, they do have
to, they typically dohave a lower base rent.
We'll talk about thathere in a little bit.
And so they do have tosacrifice a little bit, uh,
in terms of the base rentor the minimum cash rent,
uh, that's paid to them.
What do they get in return?
(11:20):
Well, if gross revenue isreally high, uh, like it
is some years, '21 and '22were good examples of that.
They share some of thathigh gross revenue.
And so, again, it hasfeatures of both the fixed
cash rent and the crop sharelease from the operator's
perspective, particularlyin today's environment,
they get a lower base.
(11:40):
And so, you know, youthink about that today,
we said there's downwardpressure on cash rent.
Uh, the example we're goingto use is a 90 percent
base rent for the flex.
And so right away,the, the, the, the base
rent goes down to 90%.
Well, if there's no bonus,they pay lower cash rent.
And so that's, that'sattractive to the operator,
particularly in today's,uh, today's environment.
(12:02):
Now, I call this an advantageyou can dispute whether you
think this is an advantage,but if you're, if you're
using a flexible cash rentlease, you definitely have
to have more communication.
I think that's positive.
One of the things I've seenby talking to people that
have problems associated withleases, Todd gets these calls
all the time too, is theydidn't communicate very well.
(12:24):
The flex leases forces theoperator and the landlord
to communicate because youhave to communicate, uh, to
define, uh, define the termsthat we're going to be talking
about here in a little bit.
Todd Kuethe (12:34):
And I think, you know, consistent
with that argument.
It also encouragesa bit of formality.
But so as long as I've beeninvolved with, uh, extension
of a time, ag economistsare all saying all leases
should be in writing.
That should bewhat we should do.
But we know from interactingfrom people on both sides
in rental negotiations thosearen't always in writing.
Sometimes they'rejust oral agreements.
(12:56):
Um, or the things workwell, and if it works
well, that's good.
But when things, uh, fallapart, then then not having
it formally written down.
So I think the other part ofthat is in that communication,
it, it leads to a littlebit of sort of formality in
terms of, um, having somewritten agreement in terms
of this is exactly what thebasis and this is exactly
how the bonus will work.
(13:17):
Um, but at the sametime, maybe those extra
conversations aren'talways aren't always fun.
So I'll, I'll, I'llbother you when I get
to the cost side of it.
James Mintert (13:26):
Not everybody wants to do that.
Right?
So, you know, if you thinkabout it, Michael, you
talked about it from thestandpoint from the operator.
Risk is reduced.
I'd argue there'ssome benefits for
a landlord, right?
So there, there must be somereason why a land owner would
be willing to, uh, and findit advantageous to take that
lower base rent that youdescribed of maybe 10 percent
(13:48):
less than what's consideredto be the market rate and that
is the opportunity to benefitin those very good years.
We've had several really goodexamples of that recently.
Michael Langemeier (13:56):
Yeah, and in fact, the example we're
going to go through here,half the time that the gross
revenue was relatively highsince 2007, and the landlord
would have got a bonus.
Yeah.
And so that, that'swhat you're getting
in return to having,having that lower base.
James Mintert (14:09):
So I, from my standpoint, I think both
sides can benefit, whichis why you might actually
think about doing this.
If only one side benefits,it's not going to
work very well, right?
Todd Kuethe (14:17):
Well, and, and I think the, the thing that
seems like, you know, bothtenants and landlords are
always wanting is to havea successful relationship
that they can expect to goon into the future, right?
So your landlord says, I'vegot this really good tenant,
I want to make sure they stayhappy and that they're doing
well, um, that they're, youknow, able to profit enough
to stay tenant for a longtime where you have a farmer
(14:39):
that says, Oh, I've gotthis really good landowner.
They're, they're really nice.
They're understandingeverything.
I want to make sure wecan keep them happy.
And so I think we can dois sort of, uh, essentially
we're, you know, hinting atalready, but sort of smoothing
those, uh, downside times.
Um, and and sharing in thoseupside times I think is what
both sides are looking for.
James Mintert (14:58):
Yeah, that's exactly right.
So, some disadvantages though.
You're talking about somecomplexity here relative to
a straight cash rent, right?
That's one of thedisadvantages.
Michael Langemeier (15:08):
To the landowner's perspective,
there is, there is morerisk than there would
be with fixed cash rent.
But we got to remember, thefixed cash rent has fairly,
fairly low rent to landowner,but not for the operator.
Whereas you take the cropshare lease, they're sharing
quite a bit of the risk.
But from thelandlord's perspective,
that's quite risky.
And so again, this flexiblecash rent's in between.
(15:29):
But it is more riskythan the fixed cash rent.
Uh, and so that'sdefinitely the case.
A couple of other caveatshere that, that could
run, you could run intosome problems with is you
have to have some kind ofmechanism to validate yield.
Now with yield monitors,that shouldn't be, that
shouldn't be that difficult,but, but that is a must.
Uh, you've got to developtrust there and, and, and
(15:50):
everybody's got to agree ona method, uh, to value, value
those yields for, for corn,soybeans, and what other
crops, uh, you're producing.
Probably the moredifficult one is price.
You've got to come tosome kind of agreement
of, of what price.
Is it a crop insurance price?
Spring, fall, just the fall?
Is it a price in thefirst week of December
(16:10):
at a specific elevator?
You've got to define thatand agree on that price.
And again, the moretransparent you can make
the yield and the pricevalidation, the better.
It should be a price andyield that someone could,
particularly on the priceside, where someone could
go to the internet ormake a couple phone calls
and they know exactly Uh,where the price came from.
James Mintert (16:33):
And I think we really want to stress
that you don't want to makethe pricing too complicated.
In fact, when we've haddiscussions with folks
at workshops, it oftenrevolves around the
difficulty in deciding onwhat price series to use.
A couple of thingsto think about.
We advocate using a publicprice series, uh, crop
insurance prices that areset in the spring, actually
(16:54):
late winter, and fall area good place to start.
That might not be the endpoint for you, but that's a
good place to start becauseit's publicly available.
It's easy to access.
Um, and if you get toocomplicated with respect to
price, you don't need, youdon't need to do things that
are overly complicated becausethat just makes your lease
arrangement way too complex.
So you want to keepit fairly simple.
(17:16):
Keep it based on somethingthat's publicly reported,
easily accessible, and youknow, sometimes people think,
well, those crop insuranceprices don't necessarily
reflect the prices that we'reselling at or could sell at.
Well, you can make anadjustment in the basis if
you want to, but still stickwith something that's probably
publicly reported, right?
So, flex leases canbe designed to flex
(17:37):
on four things.
And so I'll let youtalk about those.
Michael Langemeier (17:40):
Yeah.
Early on, we start, we firstheard about flex leases.
Here I'm talking 15, 20years ago, maybe even further
back when they startedfirst started talking about
this, it was real commonto think about flexing on
just yield or just price.
I think we've kindof moved beyond that.
Uh, and, and now it's reallycommon to flex on either one
of, in either one of two ways.
One is on gross revenue.
(18:00):
Uh, crop revenue on cropprice and crop yield.
We can keep, we can keepgovernment payments and crop
insurance indemnity paymentsout of the equation here.
And just focus on, focuson the crop revenue
or the gross revenue.
That, that would be afairly easy way, uh, to
think about a flex lease.
Uh, one that we're goingto illustrate here in
a little bit is flexingon, on, on gross revenue
above a cost trigger.
(18:22):
That would be another wayto think about a flex lease.
Uh, a flex lease, butdefinitely having both
the price and the yieldin there, uh, seems to me
to make a lot of sense.
James Mintert (18:31):
And again, I think based on our experience
in some of the workshops thatwe've done over the years,
focusing on the revenueand not including cost is
probably the way most peopleare going to want to go.
Because if you start bringingthe cost side in, you start
approaching the complexityof a crop share lease, which
is probably what you'retrying to get away from.
Michael Langemeier (18:49):
And more specifically, we
already have to, we alreadyhave to agree on how we're
going to measure yield.
We already have to agreeon how to measure price.
Cost, we just addone more wrinkle.
Whose cost?
Is it a cost budget?
Do we change that every year?
Uh, and so we've alreadygot quite a bit that we have
to agree on without addingcost to the, to the complex.
James Mintert (19:09):
Yeah.
So if somebody's gonnaask me for advice, I'm
going to suggest leavingthe cost out and just
focusing on the revenue.
Be a lot simpler.
So you've done some work whereyou've actually simulated
how this might turn outusing a farm that you have
been really using as a casefarm for a number of years.
Now, you've taken a lookat West Central Indiana
(19:29):
and estimated returns fora typical crop farm in West
Central Indiana that plants50 percent corn, 50 percent
soybeans every year and lookedat returns from a crop share
lease, a 50/50 crop share, afixed cash lease based on the
survey results for cash rentalrates in West Central Indiana.
And then finally theflexible cash lease.
(19:52):
And those results arepretty interesting, right?
Michael Langemeier (19:54):
Yeah, let's talk about the
different leases here tomake sure we understand
what we're comparing.
The crop share lease is a verytraditional lease where the
landowner pays 50 percent ofseed, fertilizer, chemical,
and crop insurance costs, ifthat's part of the equation.
And then 100 percent ofthe land ownership costs.
For that, the landlordreceives 50 percent
of all revenue.
(20:16):
We talked about this before,but one of the problems
with the crop share leaseis many land, landowners
don't light right in thatcheck for seed fertilizer,
chemical and crop insurance.
And with a crop sharelease, they have to do that.
With the other two leaseswe're going to talk about,
uh, that that's not necessary.
Uh, but it iswith a crop share.
The fixed cash rentis just a so much, so
many dollars per acre.
(20:37):
The flexible cash lease, thesecan look very, very different.
So I've got a veryspecific example here.
Um, I, if someone givesme a call, I can give
them other examples thatmight make some sense.
Uh, but this one isgoing to flex on gross
revenue and costs.
And so let's talk alittle bit about that.
First of all, the baserent is set at 90 percent
(20:57):
of fixed cash lease.
I've seen some with a lowerbase, I've seen some of
the higher base, you haveto change the bonus, how
to calculate the bonusif you if you change the
change that base percentage.
For this one, the one thatmakes sense and compares
quite well in terms of longrun net return, uh, to, to,
uh, crop share and fixedcash rent, uh, is to have
(21:19):
a bonus, uh, based on, ongross revenue above non land
cost plus base, base rent.
So let's call the nonland cost plus, plus
base rent a cost trigger.
And so the gross revenueis above that cost
trigger, uh, the grossrevenue is shared 50/50.
So 50 percent of that extragross revenue would go to
the landlord, 50 percentwould go to the operator.
(21:43):
If the gross revenue isbelow that cost trigger,
then there's no bonus.
In about half the timefrom 2007 to 2024,
there was not a bonus.
About half the time,there was a bonus.
James Mintert (21:55):
State it another way, Michael, there's
a reason why you set thebase at 90 percent and shared
50/50 is because it looks
Michael Langemeier (22:02):
Yes.
James Mintert (22:02):
On the surface, like it's a relatively
equitable arrangement.
Michael Langemeier (22:05):
Yes.
Now when I was setting theseup, I tried to make, I tried
to make all three of theseleases relatively comparable
on a net return basis.
James Mintert (22:14):
Over long periods of time.
Michael Langemeier (22:15):
Over a long period of time.
James Mintert (22:16):
So let's talk about simulating this
over the 2022, the 2023,and the 2024 crop years.
We, you've got longerestimates than that, but we're
gonna focus on those threeyears just 'cause they're
in recent history here.
Michael Langemeier (22:28):
Yeah, these are kind of interesting
years, if you will.
Uh, particularly '22contrast with the other two.
For '22 is a good, a verygood net return, uh, to.
land period.
In fact, we had a verystrong gross revenue
for both crop price andand and yield reasons.
But in this case, the fixedcash rent was $289 per acre.
(22:48):
Average productivity landin West Central Indiana.
The base rent was 260or 90 percent of that
market cash rent.
Uh, the revenue was about$100 higher than the cost
trigger, which is nonland cost plus base rent.
And so, uh, to calculate thebonus, you take that 100 of
extra revenue, multiply itby 50%, and the landowner
(23:12):
got about a $50 bonus.
And so we add that tothe base rent, uh, the
landowner got $310 peracre rent, in this case.
rather than just 289.
So you got about 20extra rent in 2022.
2021 was even even ahigher bonus than 2022.
Todd Kuethe (23:31):
So just also to be clear, what do you
when you think about these,uh, flexible agreements,
when do you think thosepayments should occur?
Or when do you observe thoseoccurring in terms because a
lot of times here in Indianawe do, sort of split, you
know, 50 before planting, 50after harvest kind of idea.
Michael Langemeier (23:50):
Yeah, we were talking about this before
the podcast and Jim whatyou were mentioning I think
a very logical way to splitthis is, you know, if you have
a fixed cash rent you mightsplit it in two So, uh, you
know two different payments.
Well, you could dothe same thing here.
You can split the base rentin two and then the bonus
is on the second payment.
Now one of the things that'sreally important to think
(24:10):
about when you're doing a flexlease is when you're setting
that price, I would notset it after December 31st.
Set it in the same yearas the crop was harvested.
The reason for thatis related to taxes.
A lot of us are on acalendar year tax basis,
and you wouldn't necessarilywant part of that rent,
particularly the bonus,going into the next year.
(24:32):
So that's somethingto think about.
So that second payment wouldprobably be in, uh, December.
Sometime like that.
James Mintert (24:38):
Or if you do it, just be
Michael Langemeier: Realizing you're doing it. (24:40):
undefined
James Mintert (24:41):
Be cognizant of what you're
doing there, right?
Michael Langemeier (24:42):
And maybe just the bonus would
be in that extra year.
James Mintert (24:44):
Yeah, so
Michael Langemeier (24:45):
You could do it that way.
James Mintert (24:45):
But if you go down that path,
recognize what you're doing.
Michael Langemeier (24:48):
Yes.
James Mintert: So that was 2022. (24:48):
undefined
What about 2023?
Michael Langemeier (24:52):
'23 and '24 are very similar.
You take 90 percent,90 percent of the
market cash rent.
That's approximately$250 for both years.
But in this case, the revenuefell far short of the of
the of the cost trigger.
So there's no bonus.
And so in those particularyears, the landowner got the
base rent, which was $250.
James Mintert (25:15):
So you've taken a look at the comparison
of net returns for a cropshare lease and a fixed
cash rent lease from alandlord's perspective.
And that's kind ofilluminating to see the
difference there becausethose crop share returns
are pretty variable.
Michael Langemeier (25:31):
They're very, they're quite variable,
uh, but they share the risk.
They do the best job ofsharing the risk, uh, but
if you look at it from aland owner perspective in,
in particular, uh, they're,they're quite variable.
I mean, some years the, the,you get a lot more money
than the fixed cash rent.
Other years you might get ahundred to 125 dollars less
than the fixed cash rent.
And so they're prettyextreme, uh, compared
(25:52):
to fixed cash rent.
James Mintert (25:54):
And you've also compared the fixed cash
rent to returns from theflexible cash lease that
you've already described.
Michael Langemeier (26:00):
And again, if you look at these two
slides, and I encourage you todo that, we've got, you know,
they're in the publication,uh, publication that we'll
talk about at the end.
But when you look at thesetwo slides, at first glance,
you say, well, there's notmuch difference between,
uh, you know, comparingfixed cash to crop share and
fixed cash to flexible cash.
Look at that fixed cashand flexible cash again.
Essentially what thatflexible cash rent is
(26:22):
doing is it's eliminatingsome of the downside risk.
You still have that, thoseyears, which is about half
the years, where the baserent is below the market
cash rent, so you're, you'redropping $25, $30 per acre.
Lower lower rent inthose particular years,
but in the good years,you're getting a higher,
(26:42):
you're getting a bonus.
You're getting a higher rent.
'21, for example, we hada bonus of about $140.
And so you're getting,you're getting a cash rent
in excess of 350, whereas theaverage was closer to 250.
James Mintert (26:57):
So one of the most interesting charts in
the publication, Michael, Ithought was when you looked
at the difference betweenreturns to a fixed cash rent
lease versus the flexible,uh, and versus the share rent.
And that really highlightsthe difference between
these two arrangements.
Michael Langemeier (27:14):
Now you guys know that I, I like
to talk about downside riskand I'm fairly risk averse.
And so when I look atthese, it's a no brainer.
The flexible cash rent leasehas a lot less downside risk
than the crop share lease.
But again, there'll be yearswhere that crop share lease
is quite a bit better thanthe flexible cash rent lease.
(27:37):
But one of the things thatthis diagram illustrates
again is something Imentioned earlier, how
volatile, how variable thatcrop share lease really is.
I mean, there's yearswhere you're, you're a
hundred to $125 belowthe fixed cash rent.
Whereas that flexible,flexible cash rent, you're
only only gonna be 10%below in any given year.
(27:58):
That's the minimum.
That minimum is soimportant for the landowners
that are really worriedabout downside risk.
James Mintert (28:04):
Yeah, really smooths the returns.
Michael Langemeier (28:06):
It really smooths them out.
James Mintert: Pretty dramatically. (28:07):
undefined
Let's take a look atthe bonus payments.
You've looked at thatgoing back to 2007 and.
I think the first pointthat jumps out at me,
Michael, is there's a numberof years, almost half.
That the bonuspayment is zero.
Michael Langemeier (28:21):
Yeah, the way I thought about
the bonus payments andagain, these could be quite
different depending onhow you set the base rent,
how you set the bonus.
The way I think about this isyou don't necessarily want to
pay out a bonus every year.
This is really reserved forreally good years when the
gross revenue is really high.
Another way of saying that iswe all know that some years
(28:42):
you have an economic loss.
Uh, from a, from a budgetand actual, uh, net return
standpoint, some years youhave an economic profit.
In those economic profityears, we want to, we
want to have a bonus.
In those economic lossyears, we don't want a bonus.
And so that's what this,this, uh, chart that looks at
the bonuses is really doing.
In those economic profityears, we're sharing
(29:03):
some of that profit.
In the economic lossyears, uh, the landlord is
simply getting that baserent and gets no bonus.
James Mintert (29:10):
So, to think about that in terms
of, you know, how manyyears that took place,
from 2007 to 2013, underthis arrangement, we were
generating a bonus payment.
It varied quite a bit byyear, but still, there was
a positive bonus payment.
From 2014 through 2019,there was no bonus payment.
Then we had '20, '21, and'22, we had bonus payments,
(29:31):
with a very large one in 2021.
And now in '23 and '24, we'reback to zero bonus payments.
So that just kind ofillustrates how this has
worked out over the last, uh,what, 17 or so years, right?
So, all right, thatkind of wraps up our
podcast for today.
Michael, you'vealluded to this.
There is more detailon the website.
(29:51):
You've got an entirepublication called
"Comparing Net Returnsfor Alternative Leasing
Arrangements", which youactually publish every year.
The most recent updateis just a few weeks ago.
Michael Langemeier (30:01):
Usually in August, I put, add
another year to it anddo the comparison again.
And, uh, it's always,it's always interesting
because, because we knowrents, rent, rents and net
returns, uh, vary quitea bit from year to year.
So it's always interestingto see what the
latest year's results.
James Mintert (30:16):
So you can get that on the website.
When you go to thewebsite, which is
purdue.edu/commercialag,just click on the menu that
says series, that's a dropdown menu, and then select
the Leasing Land series,and this article that
Michael was just referencingshould pop up number one.
Michael Langemeier (30:30):
Another couple publications at leasing
land series that you mightwant to take a look at here.
Uh, I have a, I havea publication on the
importance of communication.
I also have a, also have ashort piece on what should be
in a, in a landlord report.
I encourage operators tohave an ending, end of the
year report telling themwhat went on during the year.
(30:51):
I've got a publicationrelated, related to that.
And I also have some veryshort pieces on what do you
do in cases where, uh, the,you know, the, the operator
wants to put in tile drainage?
How do we adjust the rentalterms and how do we make
sure that that gets paid for,uh, maybe by splitting the
cost or something like that.
And so that's off topic forwhat we're talking about
today, but I did want tomention those are part of
(31:12):
that leasing land series.
James Mintert: Yeah, good point. (31:14):
undefined
And Todd, your publicationon Indiana Farmland Values
and Cash Rental Rates alsoavailable on the website?
Tell us where theycan find that.
Todd Kuethe (31:21):
Yeah, that's, uh, also on the website for the
publications drop down menu.
And you can just select,uh, Indiana farmland values
and cash rental rates.
We have, uh, the currentone, but we also have all
the archived ones in caseyou want to, uh, fill in
on the years you missed.
James Mintert (31:34):
And we get calls for that periodically.
There's a lot of reasonswhy people necessarily
want to go back and lookat some of the older data
and it is on the website.
So
Todd Kuethe (31:42):
A lot of sort of estate planning,
intergenerational things.
Uh, people will occasionallywant to refer back to that.
James Mintert (31:47):
A lot of reasons why people
want to tap into that.
So, um, if you're listeningto this podcast on the
website, you can alsosubscribe to it on your
favorite podcast provider.
Uh, just do so by searchingfor Purdue Commercial AgCast.
And with that, I want tothank my colleagues, Dr.
Michael Langemeier and Dr.
Todd Kuethe forjoining us today.
On behalf of the Centerfor Commercial Agriculture.
I'm Jim Minter.
(32:07):
Thanks for joining us.
Thanks for joining us for our
Purdue Commercial AgCastpodcast, which is the
Purdue Center for CommercialAgriculture's podcast
featuring farm managementnews and information.
Joining me today aremy colleagues, Dr.
Michael Langemeier who's aprofessor of ag economics
and the associate directorof the Center for Commercial
Agriculture, and Dr.
Todd Kuethe who's a professorof ag economics and holds
the Schrader Endowed Chairin Farmland Economics
(00:27):
here in the Department ofAg Economics at Purdue.
We're going to spend thenext 30 minutes or so talking
about the comparison ofcropland flex leases to
cash rental agreements.
And that's a topic that'sreally interest to a lot of
people here in the fall of2024, especially given the
downturn that we've seenwith respect to crop prices.
(00:48):
So Todd, I want to start offthough talking a little bit
about the Purdue Farmlandand Cash Rental Rate Survey
that you conduct everyyear on behalf of Purdue.
Tell us a little bit aboutthat because we're going to
use some of the data fromthat survey when we're making
this comparison between flexleases and cash rental rates.
Todd Kuethe (01:05):
Yeah, so it's, it's a great place
to sort of start any kindof base discussion about
cash rent and we've donethe survey as a department
going back to the mid 1970s.
Every June we survey peoplewho interact with the
farmland market as part oftheir professional lives.
So we have a lot of appraisersand brokers and farm managers
(01:26):
and some lenders in there aswell, asking them about the
land market in their area.
We ask about, both land valuesand cash rents, and we ask in
their market area for the topaverage and poor, which we
don't define those for them.
We just ask them to reporttheir expectation for long
run corn yields in that area.
Then we get all thatinformation and we assemble
(01:47):
it, uh, at both the statelevel and then for six
regions around the state.
We report cash rentalrates for top, average,
and poor quality land.
James Mintert (01:57):
So as you look at it, the key there
in terms of productivityis thinking about corn
yields and using that andin that way, you can kind
of equate it back on a perbushel basis, whether you're
looking at farmland valuesor crash rental rates, right?
Todd Kuethe (02:10):
Yeah, correct.
So the idea is to be ableto put it in sort of, you
know, uh, for each bushel youyield, this is what people
are willing to pay in eitherland values or cash rent.
Um, and because, you know,high quality land is different
in one part of the stateversus the other, right?
And, and generally it's bestto, I find, uh, uh, we're
interviewing experts or askingexperts for their opinions.
(02:31):
So, um, just kindof let them tell us.
They do a better jobthan us trying to give
some, you know, very harddefinition of this is what
definition will say for top.
James Mintert (02:38):
So let's just kind of recap what's happened
with respect to cash rentalrates in 2024 based on the
summer 2024 survey and comparethose to what we saw in 2023.
Todd Kuethe (02:50):
Yeah, so the, the big takeaway, and we
just did a podcast just onthe survey, so if anyone's
really interested, go back andlisten to a longer discussion.
The biggest takeaway isthat they're relatively
flat from the two years,uh, between '23 and '24.
We were up a little bit,at the top end and at the
average, and then down alittle bit at the poor.
For 2024, top qualityland average cash rent
(03:11):
statewide of $313, whichis a little bit higher
than $306 the year before.
Uh, for average we're at260, just a smidge higher
than 257 the year before.
And 204, which is downjust a little bit from 212.
The other thing I noticedis that, you know, people
really pay attention to sortof $25 increments, right?
So we're just above 200.
(03:31):
We're a bit above 250 anda little bit above 300.
When we think about sortof at the state level.
James Mintert (03:37):
And, you know, Michael, I think based
on some of the work you'vebeen doing over the course
of the summer, the fact thatwe actually saw a little
increase on the top qualityland and a small decrease on
the lower quality land makesa lot of sense when you were
crunching the numbers, right?
Michael Langemeier: Definitely the break even (03:51):
undefined
prices are lower for thetop quality land, and so it
makes sense that there's,there's a little bit more
room for increases there,uh, compared to the average
in the poor quality land.
James Mintert (04:01):
Yeah, and the poor quality land is the
one that's really suffering.
Michael Langemeier (04:03):
Very high break even prices.
James Mintert: Yeah, good point. (04:04):
undefined
So you've taken a look at,uh, not just the state level
averages, but you actuallyfocus a little more on west
central Indiana, and that's inpart because you've developed
a simulated case farm that'sbased on crop yields and
crop production levels herein West Central Indiana.
So you've taken a look atthe West Central Indiana
regional cropland cash rentalrates going back to 2007
(04:28):
and there's a reason whythis chart starts in 2007.
So you might start there.
Michael Langemeier (04:31):
Yeah, I call that the beginning
of the ethanol boom andand certainly things have
been different since 2007.
So just right out of the gategoing from 2007 to 2014, we
saw an increase in cash rentin west central Indiana for
average land productivity.
I'm using average here.
It was 157, in 2007,it was 291 in 2014, an
(04:53):
85 percent increase.
Uh, that's prettymuch unprecedented.
So very large increaseduring that time period.
And then as we got into 2014going into 2015 net return
to land was was weaker.
And so we saw adip in cash rent.
It bottomed out and at235, 240, 2017, 2018, 2019.
(05:13):
That's about 235 to 240.
And then since then,we've seen a little
bit of an increase.
And at 2024, it'sright at about 285.
James Mintert (05:22):
And if you think about it, the
comparison, you mentioned2007 to 2014, 85 percent
increase in cash rental rates.
From 2014 to 2024, youjust take those two
endpoints, essentiallyno change, pretty flat.
And those are in nominalterms, you adjusted for
inflation, actually, thoserental rates have come
down a little bit, right?
So, let's think a littlebit about the relationship
(05:44):
between cash rental rates,And net returns to land.
To do that, we need todefine a term that you use
a lot in your writings,which is net return to land.
What do you mean bynet return to land?
Michael Langemeier (05:55):
Okay, I want to refer back to the
Purdue Cost and Return Guide.
And if you looked at that,what we do in that guide is we
use what we call full costing,or we add cash, we add
opportunity cost to cash cost.
That's very importantto understand to get to
this net return to land.
And so, in the budget,we have variable costs.
Those are almost all, uh, cashcosts, except for interest,
(06:17):
we do charge opportunitycosts on, on interest expense.
But when you get into thefixed cost areas, when you
really start talking aboutthe opportunity cost, we
have an opportunity coston owned land, for example.
We have an opportunitycost on owned machinery.
So if you own all machinery,uh, the cost is not zero for
machinery ownership, there'san opportunity cost in there.
We have an opportunitycost in operator labor
(06:39):
and family labor.
So all of that's includedin the budget, the cash
and the opportunity cost.
And when you take grossrevenue minus all the, the
variable and fixed costs,uh, you, you come up with
what we call economic profit.
Uh, to calculate net returnto land, we take economic
profit and we add backin the land cost, whether
that be opportunity costor cash rent, uh, depending
(07:01):
on whether you own or, or,own or rent the ground.
Another way to think aboutthat is, is all costs are
included except for land.
James Mintert (07:09):
And when you say land, you mean in
the context of the budgets,these cash rates that are
collected off the survey.
Michael Langemeier (07:14):
And that makes it ideal to compare
with cash rents over time.
And when we do thiscomparison for West Central,
this would be very typicalall across the Corn Belt.
What you see is a lot ofvariability in net return to
land compared to cash rents.
And it makes a lot of senseto me because you're not going
to negotiate big changes incash rent from year to year.
(07:35):
It takes time, uh, to,to change cash rent.
And essentially, uh, what,what, what has to happen
there for cash rents to goup, uh, an extended period
of time is for net return toland to be relatively strong.
We saw that from 2007 to 2014.
We saw a large increase incash rents because net return
to land was relatively strong.
(07:55):
We also saw a dip in cashrents, uh, from '14 to '19,
uh, because net return toland was relatively soft.
And then going into2021 and 22, very strong
net return to land.
Uh, we saw some increasesin cash rent there.
It's been fairlystable since 22.
Uh, however, uh, the netreturn to land in '23 and
(08:17):
'24 is relatively low.
And so, uh, I ask could wehave a repeat of the '14
to '19 period where we haveseveral years in a row of
relatively low net return toland, which would put downward
pressure on cash rent.
James Mintert (08:30):
Yeah, so
Michael Langemeier (08:31):
And that makes this discussion of flex
rents really interesting.
James Mintert (08:34):
Yeah, so I think one of the key points is
I think about looking at thischart, Michael, is the fact
that those cash rental ratessmooth out the returns to net
returns to land effectivelyis one way to think about it.
Michael Langemeier (08:45):
Yes.
James Mintert (08:46):
So, let's talk about an alternative
to cash rent, and that's theflexible cash rent lease.
And so, talk us a littlethrough that a little bit.
Michael Langemeier (08:54):
We all know that crop prices, yields,
and costs are very uncertain.
Therefore, operators andlandlords hesitate to
commit to a fixed cash rent.
You're committing to it.
That's a prettybig commitment.
And so, we used to, it usedto be more common to have
crop share leases, uh, whereyou, you shared quite a bit
of the risk associated withgross revenue and and, uh,
and you shared some of thecost, but we've kind of
(09:16):
moved away from that becausethey were quite risky.
And so these flex leases arereally something in between.
It kind of takes some ofthe features of the fixed
cash, uh, rent lease andsome of the features of the
crop share lease and comesup with another a rental
arrangement that makes, insome cases, a lot of sense.
James Mintert (09:34):
Yeah.
So that's aninteresting perspective.
You looked at some resultsfrom a recent survey of
farm managers in Illinoiswith respect to the kinds of
leases that they were using.
And those results arekind of interesting.
Michael Langemeier (09:45):
Yeah, every year, the Illinois
Professional Farm ManagementAssociation, along with
the land appraisers,do a survey related to
leasing arrangements.
And so this is the '24results, and what they found
is about a third of theleases were crop share leases.
There were some tweaks tothose crop share leases.
Some supplementalsmodifications to a true crop
(10:06):
share lease, but about athird were crop share leases.
About a third were fixedcash rent, and about a
third were variable, whatthey call variable cash
rent, which we're callingflexible cash rent today.
Now, it's important tounderstand that this was
a survey of professionalfarm managers, uh, and,
and rural appraisers, uh,because of that, the, the
(10:26):
variable cash rent or theflex lease, was a much higher
percent than it would be ifwe just, if we just surveyed
everybody in Indiana thathad leasing arrangements.
It wouldn't be a third, uh,that have flexible leases.
James Mintert (10:37):
Yeah, if we did survey everyone, we would
expect to see a much higherpercentage just on fixed cash.
Michael Langemeier: Fixed cash rent. (10:42):
undefined
James Mintert (10:43):
With some residual maybe on
the, on the crop share.
Because the crop shareleasing has definitely
been on decline.
Michael Langemeier: Definitely declined. (10:49):
undefined
James Mintert (10:50):
Over the last several decades.
So, let's talk briefly aboutsome of the advantages of
flexible cash rent leases, andwe'll also talk about a couple
of disadvantages as well.
Michael Langemeier (10:59):
Yeah, if you, if you look at it from
the landlord's perspective,and then we'll talk about
the operator's perspective.
From the land, landowner'sperspective, they do have
to, they typically dohave a lower base rent.
We'll talk about thathere in a little bit.
And so they do have tosacrifice a little bit, uh,
in terms of the base rentor the minimum cash rent,
uh, that's paid to them.
What do they get in return?
(11:20):
Well, if gross revenue isreally high, uh, like it
is some years, '21 and '22were good examples of that.
They share some of thathigh gross revenue.
And so, again, it hasfeatures of both the fixed
cash rent and the crop sharelease from the operator's
perspective, particularlyin today's environment,
they get a lower base.
(11:40):
And so, you know, youthink about that today,
we said there's downwardpressure on cash rent.
Uh, the example we're goingto use is a 90 percent
base rent for the flex.
And so right away,the, the, the, the base
rent goes down to 90%.
Well, if there's no bonus,they pay lower cash rent.
And so that's, that'sattractive to the operator,
particularly in today's,uh, today's environment.
(12:02):
Now, I call this an advantageyou can dispute whether you
think this is an advantage,but if you're, if you're
using a flexible cash rentlease, you definitely have
to have more communication.
I think that's positive.
One of the things I've seenby talking to people that
have problems associated withleases, Todd gets these calls
all the time too, is theydidn't communicate very well.
(12:24):
The flex leases forces theoperator and the landlord
to communicate because youhave to communicate, uh, to
define, uh, define the termsthat we're going to be talking
about here in a little bit.
Todd Kuethe (12:34):
And I think, you know, consistent
with that argument.
It also encouragesa bit of formality.
But so as long as I've beeninvolved with, uh, extension
of a time, ag economistsare all saying all leases
should be in writing.
That should bewhat we should do.
But we know from interactingfrom people on both sides
in rental negotiations thosearen't always in writing.
Sometimes they'rejust oral agreements.
(12:56):
Um, or the things workwell, and if it works
well, that's good.
But when things, uh, fallapart, then then not having
it formally written down.
So I think the other part ofthat is in that communication,
it, it leads to a littlebit of sort of formality in
terms of, um, having somewritten agreement in terms
of this is exactly what thebasis and this is exactly
how the bonus will work.
(13:17):
Um, but at the sametime, maybe those extra
conversations aren'talways aren't always fun.
So I'll, I'll, I'llbother you when I get
to the cost side of it.
James Mintert (13:26):
Not everybody wants to do that.
Right?
So, you know, if you thinkabout it, Michael, you
talked about it from thestandpoint from the operator.
Risk is reduced.
I'd argue there'ssome benefits for
a landlord, right?
So there, there must be somereason why a land owner would
be willing to, uh, and findit advantageous to take that
lower base rent that youdescribed of maybe 10 percent
(13:48):
less than what's consideredto be the market rate and that
is the opportunity to benefitin those very good years.
We've had several really goodexamples of that recently.
Michael Langemeier (13:56):
Yeah, and in fact, the example we're
going to go through here,half the time that the gross
revenue was relatively highsince 2007, and the landlord
would have got a bonus.
Yeah.
And so that, that'swhat you're getting
in return to having,having that lower base.
James Mintert (14:09):
So I, from my standpoint, I think both
sides can benefit, whichis why you might actually
think about doing this.
If only one side benefits,it's not going to
work very well, right?
Todd Kuethe (14:17):
Well, and, and I think the, the thing that
seems like, you know, bothtenants and landlords are
always wanting is to havea successful relationship
that they can expect to goon into the future, right?
So your landlord says, I'vegot this really good tenant,
I want to make sure they stayhappy and that they're doing
well, um, that they're, youknow, able to profit enough
to stay tenant for a longtime where you have a farmer
(14:39):
that says, Oh, I've gotthis really good landowner.
They're, they're really nice.
They're understandingeverything.
I want to make sure wecan keep them happy.
And so I think we can dois sort of, uh, essentially
we're, you know, hinting atalready, but sort of smoothing
those, uh, downside times.
Um, and and sharing in thoseupside times I think is what
both sides are looking for.
James Mintert (14:58):
Yeah, that's exactly right.
So, some disadvantages though.
You're talking about somecomplexity here relative to
a straight cash rent, right?
That's one of thedisadvantages.
Michael Langemeier (15:08):
To the landowner's perspective,
there is, there is morerisk than there would
be with fixed cash rent.
But we got to remember, thefixed cash rent has fairly,
fairly low rent to landowner,but not for the operator.
Whereas you take the cropshare lease, they're sharing
quite a bit of the risk.
But from thelandlord's perspective,
that's quite risky.
And so again, this flexiblecash rent's in between.
(15:29):
But it is more riskythan the fixed cash rent.
Uh, and so that'sdefinitely the case.
A couple of other caveatshere that, that could
run, you could run intosome problems with is you
have to have some kind ofmechanism to validate yield.
Now with yield monitors,that shouldn't be, that
shouldn't be that difficult,but, but that is a must.
Uh, you've got to developtrust there and, and, and
(15:50):
everybody's got to agree ona method, uh, to value, value
those yields for, for corn,soybeans, and what other
crops, uh, you're producing.
Probably the moredifficult one is price.
You've got to come tosome kind of agreement
of, of what price.
Is it a crop insurance price?
Spring, fall, just the fall?
Is it a price in thefirst week of December
(16:10):
at a specific elevator?
You've got to define thatand agree on that price.
And again, the moretransparent you can make
the yield and the pricevalidation, the better.
It should be a price andyield that someone could,
particularly on the priceside, where someone could
go to the internet ormake a couple phone calls
and they know exactly Uh,where the price came from.
James Mintert (16:33):
And I think we really want to stress
that you don't want to makethe pricing too complicated.
In fact, when we've haddiscussions with folks
at workshops, it oftenrevolves around the
difficulty in deciding onwhat price series to use.
A couple of thingsto think about.
We advocate using a publicprice series, uh, crop
insurance prices that areset in the spring, actually
(16:54):
late winter, and fall area good place to start.
That might not be the endpoint for you, but that's a
good place to start becauseit's publicly available.
It's easy to access.
Um, and if you get toocomplicated with respect to
price, you don't need, youdon't need to do things that
are overly complicated becausethat just makes your lease
arrangement way too complex.
So you want to keepit fairly simple.
(17:16):
Keep it based on somethingthat's publicly reported,
easily accessible, and youknow, sometimes people think,
well, those crop insuranceprices don't necessarily
reflect the prices that we'reselling at or could sell at.
Well, you can make anadjustment in the basis if
you want to, but still stickwith something that's probably
publicly reported, right?
So, flex leases canbe designed to flex
(17:37):
on four things.
And so I'll let youtalk about those.
Michael Langemeier (17:40):
Yeah.
Early on, we start, we firstheard about flex leases.
Here I'm talking 15, 20years ago, maybe even further
back when they startedfirst started talking about
this, it was real commonto think about flexing on
just yield or just price.
I think we've kindof moved beyond that.
Uh, and, and now it's reallycommon to flex on either one
of, in either one of two ways.
One is on gross revenue.
(18:00):
Uh, crop revenue on cropprice and crop yield.
We can keep, we can keepgovernment payments and crop
insurance indemnity paymentsout of the equation here.
And just focus on, focuson the crop revenue
or the gross revenue.
That, that would be afairly easy way, uh, to
think about a flex lease.
Uh, one that we're goingto illustrate here in
a little bit is flexingon, on, on gross revenue
above a cost trigger.
(18:22):
That would be another wayto think about a flex lease.
Uh, a flex lease, butdefinitely having both
the price and the yieldin there, uh, seems to me
to make a lot of sense.
James Mintert (18:31):
And again, I think based on our experience
in some of the workshops thatwe've done over the years,
focusing on the revenueand not including cost is
probably the way most peopleare going to want to go.
Because if you start bringingthe cost side in, you start
approaching the complexityof a crop share lease, which
is probably what you'retrying to get away from.
Michael Langemeier (18:49):
And more specifically, we
already have to, we alreadyhave to agree on how we're
going to measure yield.
We already have to agreeon how to measure price.
Cost, we just addone more wrinkle.
Whose cost?
Is it a cost budget?
Do we change that every year?
Uh, and so we've alreadygot quite a bit that we have
to agree on without addingcost to the, to the complex.
James Mintert (19:09):
Yeah.
So if somebody's gonnaask me for advice, I'm
going to suggest leavingthe cost out and just
focusing on the revenue.
Be a lot simpler.
So you've done some work whereyou've actually simulated
how this might turn outusing a farm that you have
been really using as a casefarm for a number of years.
Now, you've taken a lookat West Central Indiana
(19:29):
and estimated returns fora typical crop farm in West
Central Indiana that plants50 percent corn, 50 percent
soybeans every year and lookedat returns from a crop share
lease, a 50/50 crop share, afixed cash lease based on the
survey results for cash rentalrates in West Central Indiana.
And then finally theflexible cash lease.
(19:52):
And those results arepretty interesting, right?
Michael Langemeier (19:54):
Yeah, let's talk about the
different leases here tomake sure we understand
what we're comparing.
The crop share lease is a verytraditional lease where the
landowner pays 50 percent ofseed, fertilizer, chemical,
and crop insurance costs, ifthat's part of the equation.
And then 100 percent ofthe land ownership costs.
For that, the landlordreceives 50 percent
of all revenue.
(20:16):
We talked about this before,but one of the problems
with the crop share leaseis many land, landowners
don't light right in thatcheck for seed fertilizer,
chemical and crop insurance.
And with a crop sharelease, they have to do that.
With the other two leaseswe're going to talk about,
uh, that that's not necessary.
Uh, but it iswith a crop share.
The fixed cash rentis just a so much, so
many dollars per acre.
(20:37):
The flexible cash lease, thesecan look very, very different.
So I've got a veryspecific example here.
Um, I, if someone givesme a call, I can give
them other examples thatmight make some sense.
Uh, but this one isgoing to flex on gross
revenue and costs.
And so let's talk alittle bit about that.
First of all, the baserent is set at 90 percent
(20:57):
of fixed cash lease.
I've seen some with a lowerbase, I've seen some of
the higher base, you haveto change the bonus, how
to calculate the bonusif you if you change the
change that base percentage.
For this one, the one thatmakes sense and compares
quite well in terms of longrun net return, uh, to, to,
uh, crop share and fixedcash rent, uh, is to have
(21:19):
a bonus, uh, based on, ongross revenue above non land
cost plus base, base rent.
So let's call the nonland cost plus, plus
base rent a cost trigger.
And so the gross revenueis above that cost
trigger, uh, the grossrevenue is shared 50/50.
So 50 percent of that extragross revenue would go to
the landlord, 50 percentwould go to the operator.
(21:43):
If the gross revenue isbelow that cost trigger,
then there's no bonus.
In about half the timefrom 2007 to 2024,
there was not a bonus.
About half the time,there was a bonus.
James Mintert (21:55):
State it another way, Michael, there's
a reason why you set thebase at 90 percent and shared
50/50 is because it looks
Michael Langemeier (22:02):
Yes.
James Mintert (22:02):
On the surface, like it's a relatively
equitable arrangement.
Michael Langemeier (22:05):
Yes.
Now when I was setting theseup, I tried to make, I tried
to make all three of theseleases relatively comparable
on a net return basis.
James Mintert (22:14):
Over long periods of time.
Michael Langemeier (22:15):
Over a long period of time.
James Mintert (22:16):
So let's talk about simulating this
over the 2022, the 2023,and the 2024 crop years.
We, you've got longerestimates than that, but we're
gonna focus on those threeyears just 'cause they're
in recent history here.
Michael Langemeier (22:28):
Yeah, these are kind of interesting
years, if you will.
Uh, particularly '22contrast with the other two.
For '22 is a good, a verygood net return, uh, to.
land period.
In fact, we had a verystrong gross revenue
for both crop price andand and yield reasons.
But in this case, the fixedcash rent was $289 per acre.
(22:48):
Average productivity landin West Central Indiana.
The base rent was 260or 90 percent of that
market cash rent.
Uh, the revenue was about$100 higher than the cost
trigger, which is nonland cost plus base rent.
And so, uh, to calculate thebonus, you take that 100 of
extra revenue, multiply itby 50%, and the landowner
(23:12):
got about a $50 bonus.
And so we add that tothe base rent, uh, the
landowner got $310 peracre rent, in this case.
rather than just 289.
So you got about 20extra rent in 2022.
2021 was even even ahigher bonus than 2022.
Todd Kuethe (23:31):
So just also to be clear, what do you
when you think about these,uh, flexible agreements,
when do you think thosepayments should occur?
Or when do you observe thoseoccurring in terms because a
lot of times here in Indianawe do, sort of split, you
know, 50 before planting, 50after harvest kind of idea.
Michael Langemeier (23:50):
Yeah, we were talking about this before
the podcast and Jim whatyou were mentioning I think
a very logical way to splitthis is, you know, if you have
a fixed cash rent you mightsplit it in two So, uh, you
know two different payments.
Well, you could dothe same thing here.
You can split the base rentin two and then the bonus
is on the second payment.
Now one of the things that'sreally important to think
(24:10):
about when you're doing a flexlease is when you're setting
that price, I would notset it after December 31st.
Set it in the same yearas the crop was harvested.
The reason for thatis related to taxes.
A lot of us are on acalendar year tax basis,
and you wouldn't necessarilywant part of that rent,
particularly the bonus,going into the next year.
(24:32):
So that's somethingto think about.
So that second payment wouldprobably be in, uh, December.
Sometime like that.
James Mintert (24:38):
Or if you do it, just be
Michael Langemeier: Realizing you're doing it. (24:40):
undefined
James Mintert (24:41):
Be cognizant of what you're
doing there, right?
Michael Langemeier (24:42):
And maybe just the bonus would
be in that extra year.
James Mintert (24:44):
Yeah, so
Michael Langemeier (24:45):
You could do it that way.
James Mintert (24:45):
But if you go down that path,
recognize what you're doing.
Michael Langemeier (24:48):
Yes.
James Mintert: So that was 2022. (24:48):
undefined
What about 2023?
Michael Langemeier (24:52):
'23 and '24 are very similar.
You take 90 percent,90 percent of the
market cash rent.
That's approximately$250 for both years.
But in this case, the revenuefell far short of the of
the of the cost trigger.
So there's no bonus.
And so in those particularyears, the landowner got the
base rent, which was $250.
James Mintert (25:15):
So you've taken a look at the comparison
of net returns for a cropshare lease and a fixed
cash rent lease from alandlord's perspective.
And that's kind ofilluminating to see the
difference there becausethose crop share returns
are pretty variable.
Michael Langemeier (25:31):
They're very, they're quite variable,
uh, but they share the risk.
They do the best job ofsharing the risk, uh, but
if you look at it from aland owner perspective in,
in particular, uh, they're,they're quite variable.
I mean, some years the, the,you get a lot more money
than the fixed cash rent.
Other years you might get ahundred to 125 dollars less
than the fixed cash rent.
And so they're prettyextreme, uh, compared
(25:52):
to fixed cash rent.
James Mintert (25:54):
And you've also compared the fixed cash
rent to returns from theflexible cash lease that
you've already described.
Michael Langemeier (26:00):
And again, if you look at these two
slides, and I encourage you todo that, we've got, you know,
they're in the publication,uh, publication that we'll
talk about at the end.
But when you look at thesetwo slides, at first glance,
you say, well, there's notmuch difference between,
uh, you know, comparingfixed cash to crop share and
fixed cash to flexible cash.
Look at that fixed cashand flexible cash again.
Essentially what thatflexible cash rent is
(26:22):
doing is it's eliminatingsome of the downside risk.
You still have that, thoseyears, which is about half
the years, where the baserent is below the market
cash rent, so you're, you'redropping $25, $30 per acre.
Lower lower rent inthose particular years,
but in the good years,you're getting a higher,
(26:42):
you're getting a bonus.
You're getting a higher rent.
'21, for example, we hada bonus of about $140.
And so you're getting,you're getting a cash rent
in excess of 350, whereas theaverage was closer to 250.
James Mintert (26:57):
So one of the most interesting charts in
the publication, Michael, Ithought was when you looked
at the difference betweenreturns to a fixed cash rent
lease versus the flexible,uh, and versus the share rent.
And that really highlightsthe difference between
these two arrangements.
Michael Langemeier (27:14):
Now you guys know that I, I like
to talk about downside riskand I'm fairly risk averse.
And so when I look atthese, it's a no brainer.
The flexible cash rent leasehas a lot less downside risk
than the crop share lease.
But again, there'll be yearswhere that crop share lease
is quite a bit better thanthe flexible cash rent lease.
(27:37):
But one of the things thatthis diagram illustrates
again is something Imentioned earlier, how
volatile, how variable thatcrop share lease really is.
I mean, there's yearswhere you're, you're a
hundred to $125 belowthe fixed cash rent.
Whereas that flexible,flexible cash rent, you're
only only gonna be 10%below in any given year.
(27:58):
That's the minimum.
That minimum is soimportant for the landowners
that are really worriedabout downside risk.
James Mintert (28:04):
Yeah, really smooths the returns.
Michael Langemeier (28:06):
It really smooths them out.
James Mintert: Pretty dramatically. (28:07):
undefined
Let's take a look atthe bonus payments.
You've looked at thatgoing back to 2007 and.
I think the first pointthat jumps out at me,
Michael, is there's a numberof years, almost half.
That the bonuspayment is zero.
Michael Langemeier (28:21):
Yeah, the way I thought about
the bonus payments andagain, these could be quite
different depending onhow you set the base rent,
how you set the bonus.
The way I think about this isyou don't necessarily want to
pay out a bonus every year.
This is really reserved forreally good years when the
gross revenue is really high.
Another way of saying that iswe all know that some years
(28:42):
you have an economic loss.
Uh, from a, from a budgetand actual, uh, net return
standpoint, some years youhave an economic profit.
In those economic profityears, we want to, we
want to have a bonus.
In those economic lossyears, we don't want a bonus.
And so that's what this,this, uh, chart that looks at
the bonuses is really doing.
In those economic profityears, we're sharing
(29:03):
some of that profit.
In the economic lossyears, uh, the landlord is
simply getting that baserent and gets no bonus.
James Mintert (29:10):
So, to think about that in terms
of, you know, how manyyears that took place,
from 2007 to 2013, underthis arrangement, we were
generating a bonus payment.
It varied quite a bit byyear, but still, there was
a positive bonus payment.
From 2014 through 2019,there was no bonus payment.
Then we had '20, '21, and'22, we had bonus payments,
(29:31):
with a very large one in 2021.
And now in '23 and '24, we'reback to zero bonus payments.
So that just kind ofillustrates how this has
worked out over the last, uh,what, 17 or so years, right?
So, all right, thatkind of wraps up our
podcast for today.
Michael, you'vealluded to this.
There is more detailon the website.
(29:51):
You've got an entirepublication called
"Comparing Net Returnsfor Alternative Leasing
Arrangements", which youactually publish every year.
The most recent updateis just a few weeks ago.
Michael Langemeier (30:01):
Usually in August, I put, add
another year to it anddo the comparison again.
And, uh, it's always,it's always interesting
because, because we knowrents, rent, rents and net
returns, uh, vary quitea bit from year to year.
So it's always interestingto see what the
latest year's results.
James Mintert (30:16):
So you can get that on the website.
When you go to thewebsite, which is
purdue.edu/commercialag,just click on the menu that
says series, that's a dropdown menu, and then select
the Leasing Land series,and this article that
Michael was just referencingshould pop up number one.
Michael Langemeier (30:30):
Another couple publications at leasing
land series that you mightwant to take a look at here.
Uh, I have a, I havea publication on the
importance of communication.
I also have a, also have ashort piece on what should be
in a, in a landlord report.
I encourage operators tohave an ending, end of the
year report telling themwhat went on during the year.
(30:51):
I've got a publicationrelated, related to that.
And I also have some veryshort pieces on what do you
do in cases where, uh, the,you know, the, the operator
wants to put in tile drainage?
How do we adjust the rentalterms and how do we make
sure that that gets paid for,uh, maybe by splitting the
cost or something like that.
And so that's off topic forwhat we're talking about
today, but I did want tomention those are part of
(31:12):
that leasing land series.
James Mintert: Yeah, good point. (31:14):
undefined
And Todd, your publicationon Indiana Farmland Values
and Cash Rental Rates alsoavailable on the website?
Tell us where theycan find that.
Todd Kuethe (31:21):
Yeah, that's, uh, also on the website for the
publications drop down menu.
And you can just select,uh, Indiana farmland values
and cash rental rates.
We have, uh, the currentone, but we also have all
the archived ones in caseyou want to, uh, fill in
on the years you missed.
James Mintert (31:34):
And we get calls for that periodically.
There's a lot of reasonswhy people necessarily
want to go back and lookat some of the older data
and it is on the website.
So
Todd Kuethe (31:42):
A lot of sort of estate planning,
intergenerational things.
Uh, people will occasionallywant to refer back to that.
James Mintert (31:47):
A lot of reasons why people
want to tap into that.
So, um, if you're listeningto this podcast on the
website, you can alsosubscribe to it on your
favorite podcast provider.
Uh, just do so by searchingfor Purdue Commercial AgCast.
And with that, I want tothank my colleagues, Dr.
Michael Langemeier and Dr.
Todd Kuethe forjoining us today.
On behalf of the Centerfor Commercial Agriculture.
I'm Jim Minter.
(32:07):
Thanks for joining us.
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