4 Types of Land Lease Agreements: Pros & Cons for Farmers

There’s no one-size-fits-all approach to leasing farmland.

Each type of lease agreement comes with its own pros and cons. Some are more favorable to the tenant, others to the landowner. Some require input from both parties, others give you the chance to run the show. 

It can be challenging to consider which agreement is best. So let’s walk through four types of land lease agreements to help you figure out which one is best for your needs. 

Before you start leasing land…

As you start to figure out which type of land lease agreement works best, you should get some clarity on a few important questions: 

• How much risk are you willing to tolerate? Each one of these agreements carries with it a different risk profile, so you need to know what your limits are.

• How much freedom do you want? It’s important to know whether you’re interested in running the operation or simply working for the landowner. 

• Do you need to share input costs? Some land lease agreements require the farmer to cover 100% of the input costs, while some require those costs to be shared. 

• How is the grain market likely to perform in the near future? The profitability of a particular arrangement will depend heavily both on the yield of your crops, and the state of the grain market at the time of harvest. This involves some prognostication to get right. But if you do, it will certainly pay off. 

Once you can get a handle on these questions, you should be able to figure out which of these four types of land lease agreements will work best for you and your operation. 

1. Cash Rental Agreements

In a cash rental agreement, you pay a flat amount to the landowner to farm the land for the year. This amount is predetermined before the season begins, and it remains the same regardless of crop yield. 

Additionally, you would be responsible for 100% of the input costs. 

Obviously, cash rental agreements present you with a significant opportunity. If the crop performs well or grain prices are high at harvest time, then you get to assume all of the upside that comes above the amount of the lease.

On the other hand, however, you assume the risk of your crop underperforming, or a sudden drop in grain prices. (Fortunately, there are some ways that you can hedge against this risk; for example, using futures contracts to hedge against extreme outcomes.)

If you want autonomy in how you farm the land, a cash rental agreement is certainly the ideal scenario. Unless the landowner specifically spells out any requirements in the agreement, all major farming decisions rest in your lap.

Generally speaking, if your approach to farming is more entrepreneurial in nature and you want to be CEO of the operation -- with all the risk and freedom that comes with that -- then a cash rental agreement is the best option for you. 

Looking for land to cash rent? Check out our CashRentstimate tool to see what’s on the market.

2. Crop Share Agreements

If a cash rental agreement puts all of the risk onto the tenant, a crop share agreement does the exact opposite. 

Instead of paying the landowner a fixed cash rent, you would pay the owner a fixed percentage of the value of the crop at season’s end. Generally, this is calculated as [Yield x Price per bushel]. The landowner typically receives 25% of the gross value of the crop, but that can sometimes be as high as 33%. 

So if grain prices are down or you have a poor yield, you’re not going to be on the hook for a big rental bill. 

On the other hand, if it’s a great year both for the crop and the grain market, you won’t be able to fully capitalize since the landowner will take their cut regardless. 

One major advantage is that a crop share agreement means that there’s no upfront money required, unlike with a cash rental agreement. 

Because the landowner has a much more direct interest in the performance of the crop, they’re going to be much more involved under one of these agreements. They’ll be more prescriptive of your farming practices, but on the flip side, they’ll also have to contribute to the input costs. 

Overall, if you don’t want a high risk profile and don’t mind some landowner involvement in the farm operation, then a crop share agreement could be a good fit. 

3. Flex Lease with Cash Bonus

If you want a happy medium between the two risk profiles, then there’s the option of a flex lease with a cash bonus. 

Typically, you would pay the landowner a guaranteed base cash rent, but it would end up being lower than in a cash rental agreement. The landowner would then receive a cash bonus if the gross value of the crop exceeded a predetermined amount, as well as a small percentage of the value over that amount.

A flex lease significantly reduces your upfront risk, while also allowing you to reap some of the reward of high performance. If you have a moderate risk tolerance, this is an agreement you should seriously consider. 

4. Fixed Bushel Rent

This last type of land lease agreement is probably the least common. Under a fixed bushel rent, you’re responsible for paying back the landowner with a fixed number of bushels of crop. This is the case regardless of price, or crop performance.

This is certainly the riskiest option for you, as a bad yield could be devastating. And remember: bad yields don’t just happen due to poor farming practices. You could be all set up for an exceptional harvest, and then one freak weather event causes the whole thing to come crashing down. 

While crop insurance can help mitigate some of these factors, it could probably help you stay out of the red, and not much else. 

So only take on this type of land lease agreement if you’re confident that you’ll have a good performance, and high grain prices to offset those lost bushels.

Final thoughts

There’s no one perfect type of lease agreement that works for farmer tenants. While some have more pros than cons, it all depends on exactly what you’re trying to get out of farming the land.

Given the current state of the market, however, this is a great time to engage in a cash rental agreement. That way, you can realize more of the upside you’re likely to get. 

If you’re interested in cash renting farmland, click here to get a Cashentstimate on your parcels of interest.