Flexible Cash Lease Programming in NE Flexible Cash and Alternative Lease Programming in Nebraska Presented by: T. Lemmons University of Nebraska – Lincoln Extension

Flexible Cash Lease Programming in NE Agenda What does Flexible Cash and Alternative Leasing education look like in Nebraska? What is our approach to education? What are the predominant methods of flex leasing we use? What are the challenges we are addressing? How can we assist you with flex and alternative lease education in your communities? Questions

Flexible Cash Lease Programming in NE Nebraska Program Goals and Educational Approach

Flexible Cash Lease Programming in NE Programming in Nebraska Flexible cash leases presented over the past 5 years in more than 100 locations across the state Typically will dedicate minutes of presentation time to the topic Most recently, grant funding will provide for a 2.5 hour program focusing on flexible cash and alternative lease programming Educational outreach includes: Face-2-Face workshops Awareness educational events (conferences, clinics, farm shows, etc.) On-line tools (Excel-based tools, white papers, NebGuides, Ext. Circulars, Webinars, Online Video, individual education)

Flexible Cash Lease Programming in NE Goals of the Programs Improve awareness of flex leases as a risk management and asset investment tool for producers and land owners respectively Improve the current use of flex leases – focus on greater efficiency and cleaner application of the tools Improve the use of the future flex leases – focus on greater efficiency and cleaner application of the tools with increased adoption Improve the adaptation of existing lease types to achieve regional impact and individual operational/investment objectives Demonstrate/report positive cost/benefit to all users

Flexible Cash Lease Programming in NE Approach to Programming in Nebraska

Flexible Cash Lease Programming in NE Our Approach to Programming A.Establish a “base rent” B.Decide on how the rent will be adjusted C.Establish the ceiling and floor D.Set the payment dates E.Get the lease in writing F.Communicate and maintain the lease

Flexible Cash Lease Programming in NE Our Approach to Programming Cash LeaseShare Leases Flexible Lease Unit Change Rent per Bushel Rent per Unit Price Bushel Bonus And Sched. Price Bonus And Sched. Net Change Percent/Ratio Yield Percent/Ratio Price Percent/Ratio Income Gross ChangeOverall Yield Overall Income

Flexible Cash Lease Programming in NE Examples of Methods Used in Nebraska

Flexible Cash Lease Programming in NE Alternative Leasing Methods Scheduled rents Yield schedules Price schedules Bonus rents Based on yield Based on price Based on income Total Production – Actual YieldAdjusted Rent 180 bu./acre – 189 bu./acre$274/acre 190 bu./acre – 199 bu./acre$289/acre 200 bu./acre – 209 bu./ acre$304/acre 210 bu./acre – 219 bu./acre$319/acre 220 bu./acre +$334/acre Farm Base Rent$320 5-yr Farm Olympic APH210 bu. Final Farm Production230 Additional Bushels Produced20 Rent Adjustment $1.50 x 20 $30 New Rent$350

Flexible Cash Lease Programming in NE Rent by Unit of Production

Flexible Cash Lease Programming in NE Percent or by Ratio Rent Changes - Yield

Flexible Cash Lease Programming in NE Simple Example of this Approach Farm Base Rent$ Expected Yield (in this case, 5yr farm APH)210 bu. Actual Production220 bu. Difference (Actual – Expected)+ 10 bu % New Rental Payment ($320) x (104.76) = ~$335 Represents a farm that realized % of expected production, thus receives % of expected rental payment

Flexible Cash Lease Programming in NE Other Approaches Using Ratios/% Change Variable rent by price – except……

Flexible Cash Lease Programming in NE Percent Change in Income Farm Base Rent $320 Expected Yield 210 bu. Expected Farm Price $3.50 Exp. Farm Income (less Govt.) $ Actual Yield 205 bu. Actual On-Farm Price $3.98 Actual Farm Income (less Govt.) ~$815 Difference (Ratio/%, $)~$80 / 8.0% New Rent$ Farm Base Rent $320 Expected Yield 210 bu. Expected Farm Price $3.50 Exp. Farm Income (less Govt.) $ Actual Yield 225 bu. Actual On-Farm Price $3.20 Actual Farm Income (less Govt.) ~$ Difference (Ratio/%, $)~-$14.25/ -2.4% New Rent$312.32

Flexible Cash Lease Programming in NE Other Methods Examined Percent of Gross Yield produced Based on a historic average of an area’s rent against average yield Based on a farm’s base rent against the farm’s expected on-farm-price cash received and expected rent Equations for converting bushels needed to cover rent into final landowner payments – exceeds the discussion today

Flexible Cash Lease Programming in NE Challenges in Education and Adoption

Flexible Cash Lease Programming in NE Challenge #1 How do you find a “fair” base rent? Use historic average? Use an area average? Use an expected average? Use a return on investment? Adopt from crop-share? Etc. Ultimately, the answer is – “Whatever the landowner is willing and able to accept and the tenant is willing and able to pay”

Flexible Cash Lease Programming in NE Challenge #2 No floor or ceiling on the contracts Base Rent Minimum Rent Maximum Rent Rent Range $320 $340 $300 If Rent Falls Below $300, the Default Min Payment is Made If Rent Falls Above $340, the Default Max Payment is Made

Flexible Cash Lease Programming in NE Challenge #3 Too complex for all to use…. Majority of program participants are aged 60+ Do not want to learn how to use flex leases Do not think they can learn flex leases Look at the formulas and assume it’s too tough to implement Are resistant to converting oral leases to written leases Early adopters of flex leases Young farmers and ranchers Farm management companies and independent consultants Estate owners savvy with managing financial investments

Flexible Cash Lease Programming in NE Challenge #4 Equations are just too simple to use Argument that using percentages of change or ratios develops a linear relationship that is not realistic to actual need… Rent Change Should Decrease Yield or Price Change Spread Optimum Rent Change Red Line Represents APH Yield

Flexible Cash Lease Programming in NE Challenge #5 Should flexible rents include: Lien on growing crops? Insurance payments with preference to the landowner? Government farm bill payments with a percentage to the landowner? Conservation payments included to adjust price received? Crop grazing or harvesting income, to adjust price received?

Flexible Cash Lease Programming in NE Challenge #6 Do these contracts actually work? The approach: Using historic yield data on irrigated and dryland corn farms in Pierce, NE Simulated 500 farm yields on irrigated and dryland corn farms Performed 10,000 simulated draws (Monte Carlo) across multiple years and applied rules of ratio of actual yield against expected yield and base rent Outcome: On irrigated farms – rent paid to landowners was 2% higher than crop producers On dryland farms – rent paid to producers was 1% higher than landowners Neither were statistically significant, but… On years where yields were less than expected, the producer got a rent- break On years where yields were better than expected, the landowner got a bonus More robust statistical analysis is currently being completed

Flexible Cash Lease Programming in NE Challenge #7 No tools are available to do more robust what-if analysis of flex rents NE has developed analytical tools that assist producers and landowners in understanding and evaluating flexible cash-lease options

Flexible Cash Lease Programming in NE How Nebraska Might Help Your Educational Efforts

Flexible Cash Lease Programming in NE How Can We Assist? Extension resources are available to assist you in developing flexible cash lease programming in your state We are willing to travel to location to perform train- the-trainer events and conduct producer/landowner education workshops Academic research had been conducted and is being conducted in Nebraska that validates the use of these tools as effective risk management options to provide improved income to investors (landowners) and risk protection (producers)

Flexible Cash Lease Programming in NE For More Info or Assistance Contact: Tim Lemmons Nebraska Extension Educator (preferred method) Northeast Research and Extension Center 601 E. Benjamin Ave. Suite 104 Norfolk, NE 68701

Flexible Cash Lease Programming in NE Extension is a Division of the Institute of Agriculture and Natural Resources at the University of Nebraska–Lincoln cooperating with the Counties and the United States Department of Agriculture. University of Nebraska–Lincoln Extension educational programs abide with the nondiscrimination policies of the University of Nebraska–Lincoln and the United States Department of Agriculture. Questions