Flexible rental formulas

In terms of a flexible rental rate formula, there are many options.  Every renter and landowner will find a different way to figure out rental rates, but the principle is the same:  if a landowner wants to share in the rewards of farming, he or she must also share in the risks.

Here are a few examples we’ve heard from Ontario farmers:

“With precision equipment, I know my yields and my cost per acre. I multiply the yield by Agricorp’s floating claim price, minus my inputs. We figure out a base price and I pay the landlord first, myself second and whatever is left over we split 50/50. The bonus is paid right at the year-end,.”

“My base rent is $100 and the bonus is a fixed formula based on the December average price of corn according to the Chicago Board of Trade. My landlord invoices me at the end of the year for a one-time payment and it has been that way for decades.”

“I give my landlords the option to get 15-22% of my harvest (depending on the crop) and it is up to them to market it. It is fair, it is the simplest way to ‘share crop’ and it also means they get a taste of some of the prices farmers have to deal with.”

Some farmers may prefer a ‘base plus bonus’ agreement, in which the base is a fixed rent that is paid up front and the bonus is calculated at the end of the year, based on the crop yield and commodity prices.  A base rent would be decided upon by considering the soil potential and field’s APH (actual production history), as well as the property taxes paid by the owner and the investments made by renter.

In an example from OMAFRA, base rates are set by both parties – in this case the rent is at $120/acre and a base price for corn is $3/bushel. Then the actual current year’s price of corn (based on Agricorp’s floating claim price, announced after harvest) is divided by the base price.  So if that year it was $5, then 5 divided by 3  equals 1.67.  $120 x 1.67 = $200.40.  If the corn prices stayed at $3, then rent would remain at $120.  And if corn shot up to $7, then rent would be $276.  However, this formula doesn’t take yield into consideration. With crop losses across Ontario, prices inevitably go up. More information on flexible cash rents from OMAFRA here.

An ideal formula will take both yield and commodity prices into consideration.

Kent Thiesse, a Farm Management Analyst in Minnesota, suggests having a flexible base rental and, in the case of grain corn, using 15% of the historical yields (APH) and multiplying it by the expecting crop insurance claim price on March 1st to get the base rent. Then, he would calculate a final rent by multiplying the same 15% of APH with the actual crop insurance harvest price on November 1st and if it the second number is higher than the first, it will become the final rent.  (For soybeans, he takes 20% of the APH.) Full article here.

  • His calculation for corn:   30% of APH  x  50% of $/bu = rent
  • Pre-plant:            190 bu/acre x 0.3 (30%) x  $3.75/bu  x 0.5 (50%)  =  $106.88/acre
  • Post-harvest:     190 bu/acre x 30%   x $4.25/ bu  x 50%   =  $121.13/acre   (in this case, $121.13/acre is the final rental price that year)

These formulas can be tweaked for your own purposes.  If rental rates are higher in your area, you might increase the percentage of crop (in corn from 15% to 20%).  Or what if Thiesse’s calculation for the final rent took into consideration the actual harvest that year?  If the field yielded 120 bu/acre and the price was $6.25, then the renter would be paying $112.50/acre instead of $178.13.

Get more info at these links:

  • Actual production histories by county across Ontario for Corn | Soy | Wheat
  • 2016 Agricorp claim rates
  • Share-cropping fact sheet from OMAFRA