The big jump in corn and soybean prices in the fall 2006 may have come too late to make adjustments to many ongoing leasing arrangements. The higher price regime continues but crop-farming costs are expected to be up sharply. The Purdue survey data reported in the August 2007 Purdue Ag Econ Report on average cash lease rates for 2007 may not fully reflect the increases that landlords were able to get who delayed until late fall or winter to set the cash rate for 2007.

In the quest for higher rents due to higher crop prices than were anticipated just over a year ago, an issue that quickly surfaced is “can a cash lease be made flexible (shift potential crop yields and/or crop price variation to the landlord who expects more rent, on average), but not make the landlord a “producer” and entitled to a share of the farm bill payments? Flexible cash leases are not a new discovery, but tenant interest has picked up since they face significantly higher crop input costs and no “safety net” in the current farm bill at the recent and current high price levels for crops.

A flexible cash lease is a lease that may provide the landlord with a competitive rent with a fixed cash amount and a potential cash payment component which is usually based on actual yields and/or prices.

In April 2007, the USDA issued Notice (Direct and Counter Cyclical Program) DCP-172 available online at:

www.fsa.usda.gov/Internet/FSA_Notice/dcp_172.pdf This notice illustrates cash leases that are “flexible” but do not make the landlord a “producer” and thus requiring a share of the farm bill payment for his or her land. DCP-172, in effect, states the following:

“Flexible leases with bonus payments based on factors external to the individual farm are treated as cash lease arrangements. The average cash price at a local elevator, commodity futures price for a specified period, or combination of factors not contingent on a farm’s actual price received or production could be used to adjust the cash rent and such flexible leases are cash leases for DCP payment purposes.”

To “cross the line” regarding the above stipulation, may mean that neither the tenant nor the landlord are entitled to the DCP payments. Frequently at issue is whether there was a notice to properly terminate an existing lease. Termination of an existing lease is essential to insure the current year’s lease agreement is voided and to set-up a new arrangement. Without termination and/or a new agreement, last year’s lease terms apply for the coming year. Ample advance notice is a good idea when a lease change is needed or planned – especially from a tenant’s business management point of view. The tenant may need to replace land if a lease with acceptable terms cannot be renegotiated with a landlord and fall tillage activities for the next year’s crops are part of a good farming routine. However, landlords and tenants who followed the “early agreement” (late summer and early fall) practice in 2006 for the 2007 crop-year for a cash lease may have provided a “windfall” for the tenant.