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Variable Cash Rents: Types and Evaluation

Variable Cash Rents: Types and Evaluation. Gary Schnitkey and Ryan Batts University of Illinois. Motivation. General movement from share ( the “perfect” risk sharing lease ) to cash rent Land owners view share leases as complex Land owners concerned with cash flow

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Variable Cash Rents: Types and Evaluation

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  1. Variable Cash Rents:Types and Evaluation Gary Schnitkey and Ryan Batts University of Illinois

  2. Motivation • General movement from share (the “perfect” risk sharing lease) to cash rent • Land owners view share leases as complex • Land owners concerned with cash flow • Operators concerned with co-mingled grain • Stickiness of 50-50 while land owners demanding a higher share (some modified share leases with additional rent) • Since 2006, difficulty in setting cash rent: • Higher returns to split between land owner and operatr • Higher price volatility • Higher year-to-year variability in farm returns

  3. Type: Variable Rent with Bonus Example 1: Gross revenue = $380 Rent = Minimum = $160 Example 2: Gross revenue = $600 Rent = $250 = $160 minimum + ($600 gross - $450 Base) x .45

  4. Type: Percent of Crop Revenue Example 1: Crop revenue = $380 Rent = $160 max($160,$133 = 380 x .36) Example 2: Crop revenue = $600 Rent = $216 = max($160, $216 = $600 x .36)

  5. Determining Gross Revenue • Gross Revenue = Yield x Price • Yield options: • Farm yield • Expected county yields • Prices (What and timing): • Alternatives • Local delivery point • Future prices * • Crop insurance (base, harvest) * • Timing and collection • Suggest getting through spring and harvest * Will impact rent factor level

  6. Setting Rent Factor • Cash rent / crop rev have averaged 30 % to 35% over time • Setting a rent $10 below average and varying does not reduce risk • For bonus rents, having a low base rent, a high base revenue and a high rent factor reduces risk

  7. Farm Rent Evaluator • Evaluates alternative leases including share rent, cash rent, and variable leases • For download from FAST section offarmdoc(www.farmdoc.illinois.edu)

  8. Variable rents give essentially the same return as cash rent, with lower risk

  9. Summary • Variable cash rent is a way of reducing risk to farmer • Variable rents with “high” minimums do not reduce risk • Will not counter changing input costs • Still not as risk sharing as a share rent lease

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