One of the most popular posts on my blog has been the Pasture and Cropland leases and rates, posted on August 6, 2014. With spring just around the corner, and lots of questions coming in once again on this topic, as well as some new tools that I have found, I decided to update this post.
Why are you considering a lease?
This should be the first question that you ask yourself. Identify why you are looking to lease and let that guide you through the process.
- To make money?
- To help out a friend or neighbor?
- Getting the new generation into farming/ranching?
- How long do you want to lease for?
- Consider how much involvement you want, especially as the landowner.
- What is your acceptable level of risk?
- What is the land/range quality?
Essential elements for any lease agreement:
There are some important components that must be a part of any lease agreement:
- Beginning and ending dates
- Legal names of all parties involved
- Clear, legal description of the property involved
Outside of these details, there are several factors that should be considered and agreed upon by all parties involved and documented, in detail, in the written lease agreement. Remember that the lease agreement is binding to both the lessor and the lessee, and outlines the rights and obligations of both parties. Having a written lease can serve as a reference later, helping clear up any confusion and protecting all parties involved.
The land use should also be specified, as to what is/is not allowed as a part of the lease. This could include:
- Soil Fertility.
- Number of livestock per acre.
- Where specific crops are planted.
- LMIC Fact Sheet Page 3
- Types of crops.
- Land to be used for pasture.
- Weed prevention.
- Conservation methods.
- Government program participation.
- Water usage.
- Removal of minerals, gravel, etc.
- The ability of the tenant to assign or sublet the property.
- Environmental protection of the property on soil erosion, chemical use, care of permanent crops, and structures.
- That the property is to be in substantially the same condition at the termination of the lease as when first occupied by the tenant with consideration for normal wear and tear.
- Any unlawful use would void the contract.
Repairs and improvements need to be addressed as well. Who will fix fences, check water, manage weeds, etc? Many disputes can be avoided by making all management responsibilities clear in the lease agreement.
Cropland lease agreements
Determining a rental rate
Determining the rental rate is a very important part of the lease agreement. The rate should be determined together and should be based on the property’s ability to produce. Any potential federal payments should also be considered, and each parties fair share of those payments.
The question is, what should the cash lease rate be based on? Here are some examples:
- What others are charging/paying
- Average yields
- Share of gross crop value
- Return on investment
- Crop share equivalent
- Tenant’s residual
Table 1. Irrigated and non-irrigated cropland lease rates – Monthly basis
USDA National Ag Statistics data
Remember that this data is from survey information and does not necessarily reflect local fluctuations or trends. But can serve as a good starting point in negotiations.
Fixed Cash Lease
The simplest form of lease is a fixed cash lease. This format provides the tenant with the most managerial freedom, while protecting the land owner from any market or production risk. In this case, all the risk is born by the tenant. This type of lease tends to be fairly rigid in the rate, taking a long time to change. Long term leases of this form should use a long-term average in order to attempt to find a fair rental rate. Advantages and disadvantages of fixed vs variable cash rental agreements are discussed here.
Variable cash lease
This type of lease is less rigid, with the rental rate being based on a base rent, expected yield and expected price. This lease type spreads the risk between the tenant and the landlord. This can introduce issues with yield reporting, where the tenant could benefit if yields are misrepresented.
As the rental rate is based on price received, it is very important that both parties discuss when crops or livestock will be sold and what price will be sought. Will futures contracts be used? Decisions should be made together and written in the lease agreement.
There are several ways that this rate can be determined, check out Ag Lease 101 for more info.
Crop share lease
In this form of lease agreement, the production and market risk is shared by both the tenant and the land lord. This presents the possibility for the most variable income for the land lord as the rental rate is subject to wide fluctuations due to market changes as well as weather events. The tenant and the land lord would share the management as well as capital investment in the production.
The big challenge presented here is determining the optimal division of responsibilities. A good rule of thumb is that the expense equals the share of the production. Also, do you market the crop together or do you split it and market it independently? For more discussion on the pros and cons go here.
Cropland lease resources
- Ag Lease 101: Example lease agreements, blank forms, tutorials, etc.
- FairRent: a decision tool that can help you determine a fair rental rate based on your production.
- Livestock Marketing Information Center (LMIC) Fact Sheet: “What to consider when leasing?”: A discussion on general lease terms and important considerations.
Intro to Using FairRent.umn.edu from CFFM on Vimeo.
There are several ways to determine the rate for a grazing lease. In Wyoming, the rate is typically determined on a per head basis, or by pairs if grazing cow/calf pairs. It is important to specify the stocking rate as a part of a grazing lease, assuring both the landowner and operator are on the same page. Helping to maximize the resources available while still preserving the production for future use.
Stocking rates could be expressed as the average during the grazing period, allowing for fluctuation or by animal days or animal unit days. or a maximum can be set. Livestock owner and land owner contributions must also be agreed upon, such as who will check water, fix fence, etc.
Table 2. Pasture/grazing lease rates – Monthly basis
|Year||$/acre||$/head||$/animal Unit||$/cow-calf pair|
USDA National Ag Statistics data
As with the cropland lease rates, this is also survey data and does not necessarily reflect local fluctuations, as well as market effects on rates such as the increase in cattle prices. Use it as a starting point in negotiations.
Resources for grazing leases
- Wyoming Ranch Tools AUM Value Tool: Utilize this value as a starting value when negotiating a lease. Many additional factors can influence the final cost of a lease such as; convenience, fencing, animal care, distance, etc.
- BeefBasis.com: Provides several tools including basis and price forecasts, marketing info, ration cost calculator and more.
- Ag Lease 101 – Pasture Rental Arrangements: A guide to developing a fair lease agreement for grazing.