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Determining an Equitable Crop Share Lease

Determining an Equitable Crop Share Lease. AgLease101.org a product of the North Central Farm Management Extension Committee. Should a crop-share arrangement be used?. Advantages For operator, lower operating capital requirements Shared management

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Determining an Equitable Crop Share Lease

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  1. Determining an Equitable Crop Share Lease AgLease101.org a product of the North Central Farm Management Extension Committee

  2. Should a crop-share arrangement be used? Advantages • For operator, lower operating capital requirements • Shared management • Crop sales, input purchases may be timed for tax purposes • Risks shared • Landowner can establish material participation

  3. Should a crop-share arrangement be used? Disadvantages • For landowner, income will be variable • Increased record-keeping • Shared expenses • Government programs • Crop insurance • Landowner must make marketing decisions (unless it is a nonmaterial participation lease)

  4. Should a crop-share arrangement be used? Notes • Sharing arrangement may need to change as prices or technology change • For landlord, material participation may reduce Social Security benefits in retirement

  5. Establishing a Crop-Share Arrangement • Share yield-increasing variable expenses in the same percentage as the crop • Adjust arrangement as technology changes relative costs • Share total returns in the same proportion as parties contribute resources • At the end of the lease, compensate operators for portion of long-term investments made that are not fully depreciated

  6. Establishing a Crop-Share Arrangement • Maintain open and honest communication • Make sure both parties know and understand their responsibilities. • Written leases encourage communication up front and clarify plans.

  7. Yield Input Share yield-increasing variable expenses in the same % as the crop is shared Encourages optimal input use. Yield increasing inputs may include: • Fertilizer • Irrigation water • Herbicides • Seed

  8. Share yield-increasing variable expenses in the same % as the crop is shared • For example, at $0.40/lb for fertilizer, $4 per additional bushel of corn yield

  9. Adjust arrangements as technology changes relative costs • Yield-increasing inputs shared in the same % as the crop • True substitution inputs paid by the party responsible for them in the original lease • Both? Address in lease • Corn seed with bundled traits

  10. Share total returns in the same proportion as parties contribute inputs

  11. Compensate operators for long-terminvestment remaining • If the operator shares in the cost of an input that has a useful life beyond the life of the lease, the lease should stipulate how the tenant will be compensated for any unused portion. • Lime • Alfalfa seed or establishment costs • Tiling • Underground pipe

  12. Developing an Equitable Crop-ShareLease Arrangement Crop Budget Approach Identify items and values/charges • Land • Value • Interest on land • Cash rent • Real estate taxes • Development

  13. Developing an Equitable Crop-Share Lease Arrangement (continued) • Crop machinery (and irrigation equipment, if applicable) • Depreciation • Repairs • Taxes • Insurance • Interest

  14. Developing an Equitable Crop-Share Lease Arrangement (continued) • Labor • Value is part of bargaining process • Caution: avoid forming a partnership • Management • One alternative is a percent of the average capital managed, e.g. 1 to 2.5% • Professional farm managers may charge 5-10% of adjusted gross receipts • Custom rates

  15. Cropland Rent-to-Value Ratios by Region

  16. Contributions Approach • Percentage contribution of each party is determined (Worksheet 1) • Parties share other operating expenses and income (crops, government payments, other income) in the same percentage • Note: use average costs for crop rotations

  17. Desired Share Approach • Parties specify a given percentage share basis, e.g., 60-40 and adjust contributions to fit this percentage • Use Worksheet 1 to discuss alternatives

  18. Put the Agreement in Writing • Encourages a detailed statement of the agreement, with better understanding of expectations by both parties • Serves as a reminder of agreed upon terms • Guide to heirs of either party • Documentation for tax purposes • See NCFMEC-02 for a sample form

  19. Lease Publications at AgLease101.org • Fixed and Flexible Cash Rental Arrangements For Your Farm (NCFMEC-01) • Crop Share Rental Arrangements For Your Farm (NCFMEC-02) • Pasture Rental Arrangements For Your Farm (NCFMEC-03) • Rental Agreements For Farm Buildings and Livestock Facilities (NCFMEC-04) • Beef Cow Rental Arrangements For Your Farm (NCFMEC-06)

  20. North Central Farm Management Extension Committee Providing leadership in the development of high quality research-based extension programs and publications that anticipate and meet the ever-changing business management educational needs of agricultural producers of the North Central States. Our programs and publications capitalize on the expertise of farm management faculty from throughout the region and country. AgLease 101 was developed with funding provided by the North Central Risk Management Education Center.

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