Volatile commodity markets continue to make it challenging to negotiate equitable and sustainable cash rents between landowner and farmer. Rental rates left unchanged for the past 5 years may have been un-equitable the last two years as farm profitability was higher in parts of the Midwest with respectable yields. Fixed cash rental rates negotiated last year may seem too high in the face of lower grain prices and higher fertilizer prices. A flexible cash lease may be worth considering as we continue to grapple with uncertain market conditions.
What it Can Do
The Flexible Cash Lease Calculator allows the user to input a base rent and baseline yields, prices and costs along with minimum and maximum lease amounts if desired. These parameters will serve as the basis for the base rent. Year end yields, prices and costs will be added by the user to formulate the actual “flexed” rental amount at the end of the year based on the deviations in yield, price and costs from the baseline figures.
One aspect of the Flexible Cash Lease Calculator that is different from others is the inclusion of costs as a variable in the flex lease formula. This component allows the volatility in costs to be included in the “flexible cash rent formula” if both landowner and tenant agree.
Where to Find It
The Flexible Cash Lease Calculator is an Excel Spreadsheet that can be viewed and downloaded at: http://aede.osu.edu/Programs/FarmManagement/Budgets/download.htm
How Does It Work
The Input Page is the section of the calculator where the user inputs their particular production numbers. This page has 6 different sections where user input is required for an accurate estimation of a flexible rent.
Part 1, entitled “Basic planting, yield, and rent information,” allows the user to input the expected acres of corn, soybeans, and wheat that will be planted. If other crops are grown, the user can type those in the boxes provided instead of the three defaults. The user will also be expected to type in the Base Cash Rent, which is negotiated between landowner and tenant. The user also inputs a Base Yield. This Base Yield is the typical or target yield for the field or farm and corresponds to the Base Rent. The Yr. End Yield is the actual farm yield or a third party pre-agreed upon yield for the growing season.
The user will then input their Base Price which corresponds to the base rent. Normally, crop futures may be used to estimate this number. The Yr. End Price is a harvest price or an average of a basket of marketing year prices that both parties agree upon at the lease signing. The user may then type a Minimum Rent, which will ensure that the landowner receives some compensation in case of poor performance. The Maximum Rent ensures that, in the case of a higher than expected yield or price, the tenant will receive fair compensation. These various user inputs are available for three separate crops, but will summarize to one rental rate.
Part 2, entitled “Fertilizer input costs by Crops,” allows the user to input Base and Yr. End Nitrogen, Phosphorus, and Potassium pries. These prices are to be inputted at a cost per acre rate. Just like the yield and price in Part 1, the base costs are generally what the planned costs are at the start of the lease term while the Yr. End Costs are the actual or indexed costs (costs indexed from a third party such as university enterprise budgets) during the current growing season.
Part 3, “Chemical Input Costs,” takes the Base and Yr. End Chemical prices per acre. This should include all herbicide, insecticide, and fungicide costs that are expected for the particular crops and the actual costs (or indexed costs) for the growing season.
Part 4, entitled “Diesel Input Costs,” is the farmgate cost of diesel used per acre. The 2009 OSU Extension Enterprise Budgets currently available on the OSU Farm Management website can be a useful tool in estimating the cost of diesel fuel used per acre.
Part 5, “Seed Input Costs,” will allow the user to input a seeding rate per acre a well as the Base and Yr. End seed costs per 1000. This will automatically calculate the total Base and total Yr. End Seed costs for the users benefit.
Part 6 is the “Other Input Costs” section where the user can input other costs that have not at this point been covered. These can be written or typed up to the right of the input boxes. These should be calculated in cost per acre.
This page will then calculate the total Base and Year End input costs. This section does not require any user input, but is there for reference, and will be used in the subsequent page for the calculations.
The Output Page documents four different methods of calculating your flexible cash rent.
Method I is Flexing for Price Only. This will take your base rent; multiply it by your adjusted price ratio (yr. end price divided by base price). This will equal the rent per acre, which will then be multiplied by acres grown. This is the suggested rental rate for the year based on changes in market conditions.
Method II is Flexing for Price and Yield. This method will use the same methods as above, but include the adjusted yield ratio which is the yr. end yield divided by base yield.
Method III is Flexing for Price and Input Costs. This section will combine Method I with the total input costs calculated on the user input page. This will take the adjusted input costs ratio (base input costs divided by yr. end input costs) and multiply it by the adjusted price from Method I.
Method IV incorporates flexing for Price, Yield and Input costs. This will multiply the base rent by the adjusted price ratio, adjusted yield ratio, and the adjusted input cost ratio.
In all four methods, the Total Rent per Acre line is the suggested flexed rent per acre for the land for the end of the growing season. Choosing which method to decide rental rates from will come from negotiation between land owner and tenant.