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Sharing Financial Risks with Flexible Cash Leases

Chad Hart and William Edwards

Summary

Flexible cash leases are an effective way to share yield, price and cost risk between farm tenants and landowners, while preserving the traditional operational aspects of a fixed cash rent lease. Surveys have shown that their use is increasing for cash grain farming operations. A risk simulation study was carried out that measured the level and variability of net returns to the landowner and the tenant under ten variations of flexible cash leases, including sharing gross revenue; using price, yield and/or cost indices; and adding a bonus amount to a base rent. Simulations were also carried out for a fixed cash lease, a crop share lease, and a custom farming contract, to provide comparison results. Flexible leases that incorporated yields, prices and inputs costs into the formula for determing the final rent shifted the most risk from the tenant to the landowner. Of course, the landowner benefitted from the high net return years, as well. The simulation results will be incorporated into educational materials to show the impact of including specific risk-sharing characteristics into a flexible lease agreement, so that both tenants and landowners can make more informed choices about rental arrangements.

Details

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