Rental prices for arable land have risen dramatically in recent years, with commodity prices reaching record levels and remaining high compared to historical averages. When grain prices fall, rent prices often lag behind and do not fall as quickly. As a result, farmers will have high rental prices, which will result in a loss for the year. Flexibility can also be added to the cash rental prices obtained either by the market approach and/or by the operating approach of the lessor. The first step is to develop yield and price estimates. For example, the rent of 32 $US divided by an estimated price of $US 5.00 per bushel means that the landowner would receive 6.4 bushels. Next, the percentage of the total proceeds that the landowner receives is determined. The 6.4 bushels due to the landowner, divided by the expected or average total yield of 30 bushels, represent 21.3% of the total harvest the landowner receives. Actual production figures at the end of the year can be used to adjust the number of rentals. In our example, the owner of the land would receive: more than half of Iowa`s arable land is leased to tenants. In parts of central and northern Iowa, half to two-thirds of the country is operated by tenants. On the other hand, in southern central and southeastern Iowa, less than half of the country is operated by a tenant. A fair deal is more likely if several of the above methods are used to negotiate the final rental fees.
Each method considers the agreement from a different point of view and clarifies the position of each party. Adding flexibility to an agreement is a simple way to ensure that the agreement remains fair. A fourth method of estimating a cash rental tax is to convert a harvest share agreement into a cash basis (worksheet 3). Costs and returns are estimated to determine the amount the lessor would receive under an equity agreement. The parties must agree on average prices and yields as well as the owner`s share of possible inputs such as fertilizers, chemicals or harvesting costs. Also consider the duration of the rental agreement when determining prices. Fixed land costs, such as taxes, that the landowner will continue to pay, should not be taken into account in the calculation. Returns are multiplied by the share a landowner would receive. The costs are multiplied by the share that a landowner would contribute. Not all items listed on the worksheet are distributed in all declassification agreements between the two parties. It is enough to complete the lines that are the norm in the region or that feel that they should be shared by the parties.
The present value determined using this method can be reduced to reflect the increased risk borne by the tenant under a cash arrangement (5 to 15 per cent is a usual discount factor). The advantages of fixed cash lease are as follows: the example of the farm used to illustrate the different methods used to determine a fair lease right is a quarter of land (160 acres) worth USD 900 per Acre2, mainly used for the production of dry wheat. This wing is debt-free and has a hay storage barn that is only used by the owner. The average cash rent for comparable land in the area is about 33 $US/Acre. The tenant has machines and plants worth 90,000 $US with an anticipated average lifespan of 8 years and a total recovery value of 10,000 $US. The equipment consists of a 140 hp tractor and various accessories. The operator operates another three-quarters of sections (480 Acres) outside of this agreement. The operator provides 100 hours of work worth 10.00 $US per hour and an engaged hand provides 100 hours of additional work worth 9.00 $US per hour. This is a lease agreement in which a base rent is paid and a bonus can be paid or not if the returns exceed a base target.. .