There has been much confusion about whether a flexible cash rent provision in a cash rental arrangement caused the owner to be considered “materially participating” in the risk and reward of the farm business. With the increased grain prices and subsequent increases in rental rates, farmers and land owners might want to consider a flexible cash rental arrangement. These types of arrangement allow the land owner to increase rental payments if yield and/or prices are exceptional while protecting the farmer if they are not. For more information go to
http://ohioline.osu.edu/fr-fact/0002.html.
This past summer the USDA issued guidelines that clarified their position on the issue of flexible cash rents and material participation. If the flexible cash lease terms are dependent on the production of the farmland, then USDA considers the landowner to be materially participating and the farm program payment would need to be divided between the tenant and the landowner. However, if the rental payment is based on a set amount of production tied to a future market value, not associated with the farm’s specific production then program regulations provide that this type of arrangement shall be considered a cash-lease situation because the rental payment is not contingent on the actual production of the crop or the crop proceeds.
Example: A lease states, “The annual rental payment is $150 per acre, but in the event that average corn yield for the county exceeds 170 bushels and/or the average cash price at the local elevator for the months of September, October, and November exceeds $3 per bushel, the rent per acre shall be $175 per acre.” This lease would be considered a cash lease because the bonus payment is not tied to a specific yield on the farm nor the price received for that specific production. In cash-lease situations, the tenant is eligible to receive 100 percent of the DCP payments for the applicable farm, provided all other program eligibility requirements are met.
Additional examples of flexible cash leases along with the classification into cash rent arrangement or share crop arrangement can be found in the USDA, FSA Notice DCP-172 posted to the Ohio Ag Manager Website at:
http://ohioagmanager.osu.edu/resources/dcp_172.pdf.
Since the official county average yield is typically not know until the spring following harvest, one strategy might be to base the 2008 cash rental rate on the 2007 price and yield levels. Using this strategy allow the official USDA NASS county yield to be known and allows the rent to be aligned with productivity and market prices the farmer received this year.
The burden, to decide if the flexible cash rental arrangement is to be treated as a cash lease or share crop lease, falls on the local Farm Services Agency (FSA) County Committee. However, the responsibility to communicate clearly the provisions of the rental arrangement falls on the tenant farmer. There are a few methods that are currently acceptable. The easiest is to bring a signed copy of the written farm lease containing the lease provisions to be kept on file at FSA for the length of the lease. If there is no written lease, then farmers will need to create a form that includes the provisions of the rental arrangement specifically the method of payment determination. Farmers might check with their local FSA office to see if additional information such as FSA farm number and acres would be beneficial in improving accuracy. The form should be signed by the land owner and tenant and submitted to your local FSA office.
The Farm Service Agency (FSA) and the Risk Management Agency (RMA) are reopening and extending the comment period for the advance notice of proposed rulemaking, Cash and Share Lease Provisions for Future Farm Programs. The original comment period closed November 27, 2007. FSA and RMA are reopening and extending it for 30 days from the date of this notice. This extension responds to requests from the public to provide more time to comment. This Federal Register Rules Proposal has also been posted to the OAM Website at http://ohioagmanager.osu.edu/resources/dcp_0802.pdf. Interested parties have until January 17, 2008 to submit comments. USDA invites you to submit comments on this notice. In your comment, include the volume, date, and page number of this issue of the Federal Register. You may submit comments by any of the following methods:
E-Mail: Salomon.Ramirez@wdc.usda.gov.
Mail: Director, Production, Emergencies, & Compliance Division,
Farm Service Agency (FSA), United States Department of Agriculture
(USDA), STOP 0517, 1400 Independence Avenue, SW., Washington, DC 20250-0517.
Fax: Submit comments by facsimile transmission to (202) 690-2130.