Audio Transcript

James Mintert: Thanks for joining us for our Purdue Commercial AgCast podcast, which is the Purdue Center for Commercial Agriculture’s podcast featuring farm management news and information. Joining me today are my colleagues, Dr. Michael Langemeier who’s a professor of ag economics and the associate director of the Center for Commercial Agriculture, and Dr. Todd Kuethe who’s a professor of ag economics and holds the Schrader Endowed Chair in Farmland Economics here in the Department of Ag Economics at Purdue. We’re going to spend the next 30 minutes or so talking about the comparison of cropland flex leases to cash rental agreements. And that’s a topic that’s really interest to a lot of people here in the fall of 2024, especially given the downturn that we’ve seen with respect to crop prices.

[00:00:48] Overview of Purdue Farmland & Cash Rental Rate Survey

James Mintert: So Todd, I want to start off though talking a little bit about the Purdue Farmland and Cash Rental Rate Survey that you conduct every year on behalf of Purdue. Tell us a little bit about that because we’re going to use some of the data from that survey when we’re making this comparison between flex leases and cash rental rates.

Todd Kuethe: Yeah, so it’s, it’s a great place to sort of start any kind of base discussion about cash rent and we’ve done the survey as a department going back to the mid 1970s. Every June we survey people who interact with the farmland market as part of their professional lives. So we have a lot of appraisers and brokers and farm managers and some lenders in there as well, asking them about the land market in their area. We ask about, both land values and cash rents, and we ask in their market area for the top average and poor, which we don’t define those for them. We just ask them to report their expectation for long run corn yields in that area. Then we get all that information and we assemble it, uh, at both the state level and then for six regions around the state. We report cash rental rates for top, average, and poor quality land.

James Mintert: So as you look at it, the key there in terms of productivity is thinking about corn yields and using that and in that way, you can kind of equate it back on a per bushel basis, whether you’re looking at farmland values or crash rental rates, right?

Todd Kuethe: Yeah, correct. So the idea is to be able to put it in sort of, you know, uh, for each bushel you yield, this is what people are willing to pay in either land values or cash rent. Um, and because, you know, high quality land is different in one part of the state versus the other, right? And, and generally it’s best to, I find, uh, uh, we’re interviewing experts or asking experts for their opinions. So, um, just kind of let them tell us. They do a better job than us trying to give some, you know, very hard definition of this is what definition will say for top.

James Mintert: So let’s just kind of recap what’s happened with respect to cash rental rates in 2024 based on the summer 2024 survey and compare those to what we saw in 2023.

Todd Kuethe: Yeah, so the, the big takeaway, and we just did a podcast just on the survey, so if anyone’s really interested, go back and listen to a longer discussion. The biggest takeaway is that they’re relatively flat from the two years, uh, between ’23 and ’24. We were up a little bit, at the top end and at the average, and then down a little bit at the poor. For 2024, top quality land average cash rent statewide of $313, which is a little bit higher than $306 the year before. Uh, for average we’re at 260, just a smidge higher than 257 the year before. And 204, which is down just a little bit from 212. The other thing I noticed is that, you know, people really pay attention to sort of $25 increments, right? So we’re just above 200. We’re a bit above 250 and a little bit above 300. When we think about sort of at the state level.

James Mintert: And, you know, Michael, I think based on some of the work you’ve been doing over the course of the summer, the fact that we actually saw a little increase on the top quality land and a small decrease on the lower quality land makes a lot of sense when you were crunching the numbers, right?

Michael Langemeier: Definitely the break even prices are lower for the top quality land, and so it makes sense that there’s, there’s a little bit more room for increases there, uh, compared to the average in the poor quality land.

James Mintert: Yeah, and the poor quality land is the one that’s really suffering.

Michael Langemeier: Very high break even prices.

James Mintert: Yeah, good point. So you’ve taken a look at, uh, not just the state level averages, but you actually focus a little more on west central Indiana, and that’s in part because you’ve developed a simulated case farm that’s based on crop yields and crop production levels here in West Central Indiana. So you’ve taken a look at the West Central Indiana regional cropland cash rental rates going back to 2007 and there’s a reason why this chart starts in 2007. So you might start there.

Michael Langemeier: Yeah, I call that the beginning of the ethanol boom and and certainly things have been different since 2007. So just right out of the gate going from 2007 to 2014, we saw an increase in cash rent in west central Indiana for average land productivity. I’m using average here. It was 157, in 2007, it was 291 in 2014, an 85 percent increase. Uh, that’s pretty much unprecedented. So very large increase during that time period. And then as we got into 2014 going into 2015 net return to land was was weaker. And so we saw a dip in cash rent. It bottomed out and at 235, 240, 2017, 2018, 2019. That’s about 235 to 240. And then since then, we’ve seen a little bit of an increase. And at 2024, it’s right at about 285.

James Mintert: And if you think about it, the comparison, you mentioned 2007 to 2014, 85 percent increase in cash rental rates. From 2014 to 2024, you just take those two endpoints, essentially no change, pretty flat. And those are in nominal terms, you adjusted for inflation, actually, those rental rates have come down a little bit, right?

[00:05:41] Understanding Net Return to Land

James Mintert: So, let’s think a little bit about the relationship between cash rental rates, And net returns to land. To do that, we need to define a term that you use a lot in your writings, which is net return to land. What do you mean by net return to land?

Michael Langemeier: Okay, I want to refer back to the Purdue Cost and Return Guide. And if you looked at that, what we do in that guide is we use what we call full costing, or we add cash, we add opportunity cost to cash cost. That’s very important to understand to get to this net return to land. And so, in the budget, we have variable costs. Those are almost all, uh, cash costs, except for interest, we do charge opportunity costs on, on interest expense. But when you get into the fixed cost areas, when you really start talking about the opportunity cost, we have an opportunity cost on owned land, for example. We have an opportunity cost on owned machinery. So if you own all machinery, uh, the cost is not zero for machinery ownership, there’s an opportunity cost in there. We have an opportunity cost in operator labor and family labor. So all of that’s included in the budget, the cash and the opportunity cost. And when you take gross revenue minus all the, the variable and fixed costs, uh, you, you come up with what we call economic profit. Uh, to calculate net return to land, we take economic profit and we add back in the land cost, whether that be opportunity cost or cash rent, uh, depending on whether you own or, or, own or rent the ground. Another way to think about that is, is all costs are included except for land.

James Mintert: And when you say land, you mean in the context of the budgets, these cash rates that are collected off the survey.

Michael Langemeier: And that makes it ideal to compare with cash rents over time. And when we do this comparison for West Central, this would be very typical all across the Corn Belt. What you see is a lot of variability in net return to land compared to cash rents. And it makes a lot of sense to me because you’re not going to negotiate big changes in cash rent from year to year. It takes time, uh, to, to change cash rent. And essentially, uh, what, what, what has to happen there for cash rents to go up, uh, an extended period of time is for net return to land to be relatively strong.

We saw that from 2007 to 2014. We saw a large increase in cash rents because net return to land was relatively strong. We also saw a dip in cash rents, uh, from ’14 to ’19, uh, because net return to land was relatively soft. And then going into 2021 and 22, very strong net return to land. Uh, we saw some increases in cash rent there. It’s been fairly stable since 22. Uh, however, uh, the net return to land in ’23 and ’24 is relatively low. And so, uh, I ask could we have a repeat of the ’14 to ’19 period where we have several years in a row of relatively low net return to land, which would put downward pressure on cash rent.

James Mintert: Yeah, so

Michael Langemeier: And that makes this discussion of flex rents really interesting.

James Mintert: Yeah, so I think one of the key points is I think about looking at this chart, Michael, is the fact that those cash rental rates smooth out the returns to net returns to land effectively is one way to think about it.

Michael Langemeier: Yes.

[00:08:46] Flexible Cash Rent Leases

James Mintert: So, let’s talk about an alternative to cash rent, and that’s the flexible cash rent lease. And so, talk us a little through that a little bit.

Michael Langemeier: We all know that crop prices, yields, and costs are very uncertain. Therefore, operators and landlords hesitate to commit to a fixed cash rent. You’re committing to it. That’s a pretty big commitment. And so, we used to, it used to be more common to have crop share leases, uh, where you, you shared quite a bit of the risk associated with gross revenue and and, uh, and you shared some of the cost, but we’ve kind of moved away from that because they were quite risky.

And so these flex leases are really something in between. It kind of takes some of the features of the fixed cash, uh, rent lease and some of the features of the crop share lease and comes up with another a rental arrangement that makes, in some cases, a lot of sense.

James Mintert: Yeah. So that’s an interesting perspective. You looked at some results from a recent survey of farm managers in Illinois with respect to the kinds of leases that they were using. And those results are kind of interesting.

Michael Langemeier: Yeah, every year, the Illinois Professional Farm Management Association, along with the land appraisers, do a survey related to leasing arrangements. And so this is the ’24 results, and what they found is about a third of the leases were crop share leases. There were some tweaks to those crop share leases. Some supplementals modifications to a true crop share lease, but about a third were crop share leases. About a third were fixed cash rent, and about a third were variable, what they call variable cash rent, which we’re calling flexible cash rent today.

Now, it’s important to understand that this was a survey of professional farm managers, uh, and, and rural appraisers, uh, because of that, the, the variable cash rent or the flex lease, was a much higher percent than it would be if we just, if we just surveyed everybody in Indiana that had leasing arrangements. It wouldn’t be a third, uh, that have flexible leases.

James Mintert: Yeah, if we did survey everyone, we would expect to see a much higher percentage just on fixed cash.

Michael Langemeier: Fixed cash rent.

James Mintert: With some residual maybe on the, on the crop share. Because the crop share leasing has definitely been on decline.

Michael Langemeier: Definitely declined.

James Mintert: Over the last several decades.

So, let’s talk briefly about some of the advantages of flexible cash rent leases, and we’ll also talk about a couple of disadvantages as well.

Michael Langemeier: Yeah, if you, if you look at it from the landlord’s perspective, and then we’ll talk about the operator’s perspective. From the land, landowner’s perspective, they do have to, they typically do have a lower base rent. We’ll talk about that here in a little bit. And so they do have to sacrifice a little bit, uh, in terms of the base rent or the minimum cash rent, uh, that’s paid to them. What do they get in return?

Well, if gross revenue is really high, uh, like it is some years, ’21 and ’22 were good examples of that. They share some of that high gross revenue. And so, again, it has features of both the fixed cash rent and the crop share lease from the operator’s perspective, particularly in today’s environment, they get a lower base. And so, you know, you think about that today, we said there’s downward pressure on cash rent. Uh, the example we’re going to use is a 90 percent base rent for the flex. And so right away, the, the, the, the base rent goes down to 90%. Well, if there’s no bonus, they pay lower cash rent. And so that’s, that’s attractive to the operator, particularly in today’s, uh, today’s environment. Now, I call this an advantage you can dispute whether you think this is an advantage, but if you’re, if you’re using a flexible cash rent lease, you definitely have to have more communication.

I think that’s positive. One of the things I’ve seen by talking to people that have problems associated with leases, Todd gets these calls all the time too, is they didn’t communicate very well. The flex leases forces the operator and the landlord to communicate because you have to communicate, uh, to define, uh, define the terms that we’re going to be talking about here in a little bit.

Todd Kuethe: And I think, you know, consistent with that argument. It also encourages a bit of formality. But so as long as I’ve been involved with, uh, extension of a time, ag economists are all saying all leases should be in writing. That should be what we should do. But we know from interacting from people on both sides in rental negotiations those aren’t always in writing. Sometimes they’re just oral agreements. Um, or the things work well, and if it works well, that’s good. But when things, uh, fall apart, then then not having it formally written down. So I think the other part of that is in that communication, it, it leads to a little bit of sort of formality in terms of, um, having some written agreement in terms of this is exactly what the basis and this is exactly how the bonus will work. Um, but at the same time, maybe those extra conversations aren’t always aren’t always fun. So I’ll, I’ll, I’ll bother you when I get to the cost side of it.

James Mintert: Not everybody wants to do that. Right? So, you know, if you think about it, Michael, you talked about it from the standpoint from the operator. Risk is reduced. I’d argue there’s some benefits for a landlord, right? So there, there must be some reason why a land owner would be willing to, uh, and find it advantageous to take that lower base rent that you described of maybe 10 percent less than what’s considered to be the market rate and that is the opportunity to benefit in those very good years. We’ve had several really good examples of that recently.

Michael Langemeier: Yeah, and in fact, the example we’re going to go through here, half the time that the gross revenue was relatively high since 2007, and the landlord would have got a bonus. Yeah. And so that, that’s what you’re getting in return to having, having that lower base.

James Mintert: So I, from my standpoint, I think both sides can benefit, which is why you might actually think about doing this. If only one side benefits, it’s not going to work very well, right?

Todd Kuethe: Well, and, and I think the, the thing that seems like, you know, both tenants and landlords are always wanting is to have a successful relationship that they can expect to go on into the future, right? So your landlord says, I’ve got this really good tenant, I want to make sure they stay happy and that they’re doing well, um, that they’re, you know, able to profit enough to stay tenant for a long time where you have a farmer that says, Oh, I’ve got this really good landowner. They’re, they’re really nice. They’re understanding everything. I want to make sure we can keep them happy. And so I think we can do is sort of, uh, essentially we’re, you know, hinting at already, but sort of smoothing those, uh, downside times. Um, and and sharing in those upside times I think is what both sides are looking for.

James Mintert: Yeah, that’s exactly right. So, some disadvantages though. You’re talking about some complexity here relative to a straight cash rent, right? That’s one of the disadvantages.

Michael Langemeier: To the landowner’s perspective, there is, there is more risk than there would be with fixed cash rent. But we got to remember, the fixed cash rent has fairly, fairly low rent to landowner, but not for the operator. Whereas you take the crop share lease, they’re sharing quite a bit of the risk. But from the landlord’s perspective, that’s quite risky. And so again, this flexible cash rent’s in between. But it is more risky than the fixed cash rent. Uh, and so that’s definitely the case.

A couple of other caveats here that, that could run, you could run into some problems with is you have to have some kind of mechanism to validate yield. Now with yield monitors, that shouldn’t be, that shouldn’t be that difficult, but, but that is a must. Uh, you’ve got to develop trust there and, and, and everybody’s got to agree on a method, uh, to value, value those yields for, for corn, soybeans, and what other crops, uh, you’re producing. Probably the more difficult one is price.

You’ve got to come to some kind of agreement of, of what price. Is it a crop insurance price? Spring, fall, just the fall? Is it a price in the first week of December at a specific elevator? You’ve got to define that and agree on that price. And again, the more transparent you can make the yield and the price validation, the better. It should be a price and yield that someone could, particularly on the price side, where someone could go to the internet or make a couple phone calls and they know exactly Uh, where the price came from.

James Mintert: And I think we really want to stress that you don’t want to make the pricing too complicated. In fact, when we’ve had discussions with folks at workshops, it often revolves around the difficulty in deciding on what price series to use.

A couple of things to think about. We advocate using a public price series, uh, crop insurance prices that are set in the spring, actually late winter, and fall are a good place to start. That might not be the end point for you, but that’s a good place to start because it’s publicly available. It’s easy to access. Um, and if you get too complicated with respect to price, you don’t need, you don’t need to do things that are overly complicated because that just makes your lease arrangement way too complex. So you want to keep it fairly simple. Keep it based on something that’s publicly reported, easily accessible, and you know, sometimes people think, well, those crop insurance prices don’t necessarily reflect the prices that we’re selling at or could sell at. Well, you can make an adjustment in the basis if you want to, but still stick with something that’s probably publicly reported, right?

So, flex leases can be designed to flex on four things. And so I’ll let you talk about those.

Michael Langemeier: Yeah. Early on, we start, we first heard about flex leases. Here I’m talking 15, 20 years ago, maybe even further back when they started first started talking about this, it was real common to think about flexing on just yield or just price.

I think we’ve kind of moved beyond that. Uh, and, and now it’s really common to flex on either one of, in either one of two ways. One is on gross revenue. Uh, crop revenue on crop price and crop yield. We can keep, we can keep government payments and crop insurance indemnity payments out of the equation here. And just focus on, focus on the crop revenue or the gross revenue. That, that would be a fairly easy way, uh, to think about a flex lease. Uh, one that we’re going to illustrate here in a little bit is flexing on, on, on gross revenue above a cost trigger. That would be another way to think about a flex lease. Uh, a flex lease, but definitely having both the price and the yield in there, uh, seems to me to make a lot of sense.

James Mintert: And again, I think based on our experience in some of the workshops that we’ve done over the years, focusing on the revenue and not including cost is probably the way most people are going to want to go. Because if you start bringing the cost side in, you start approaching the complexity of a crop share lease, which is probably what you’re trying to get away from.

Michael Langemeier: And more specifically, we already have to, we already have to agree on how we’re going to measure yield. We already have to agree on how to measure price. Cost, we just add one more wrinkle. Whose cost? Is it a cost budget? Do we change that every year? Uh, and so we’ve already got quite a bit that we have to agree on without adding cost to the, to the complex.

James Mintert: Yeah. So if somebody’s gonna ask me for advice, I’m going to suggest leaving the cost out and just focusing on the revenue. Be a lot simpler.

[00:19:15] Comparing Different Leases Types

James Mintert: So you’ve done some work where you’ve actually simulated how this might turn out using a farm that you have been really using as a case farm for a number of years. Now, you’ve taken a look at West Central Indiana and estimated returns for a typical crop farm in West Central Indiana that plants 50 percent corn, 50 percent soybeans every year and looked at returns from a crop share lease, a 50/50 crop share, a fixed cash lease based on the survey results for cash rental rates in West Central Indiana. And then finally the flexible cash lease. And those results are pretty interesting, right?

Michael Langemeier: Yeah, let’s talk about the different leases here to make sure we understand what we’re comparing. The crop share lease is a very traditional lease where the landowner pays 50 percent of seed, fertilizer, chemical, and crop insurance costs, if that’s part of the equation. And then 100 percent of the land ownership costs. For that, the landlord receives 50 percent of all revenue. We talked about this before, but one of the problems with the crop share lease is many land, landowners don’t light right in that check for seed fertilizer, chemical and crop insurance. And with a crop share lease, they have to do that. With the other two leases we’re going to talk about, uh, that that’s not necessary. Uh, but it is with a crop share.

The fixed cash rent is just a so much, so many dollars per acre.

The flexible cash lease, these can look very, very different. So I’ve got a very specific example here. Um, I, if someone gives me a call, I can give them other examples that might make some sense. Uh, but this one is going to flex on gross revenue and costs. And so let’s talk a little bit about that. First of all, the base rent is set at 90 percent of fixed cash lease. I’ve seen some with a lower base, I’ve seen some of the higher base, you have to change the bonus, how to calculate the bonus if you if you change the change that base percentage. For this one, the one that makes sense and compares quite well in terms of long run net return, uh, to, to, uh, crop share and fixed cash rent, uh, is to have a bonus, uh, based on, on gross revenue above non land cost plus base, base rent. So let’s call the non land cost plus, plus base rent a cost trigger. And so the gross revenue is above that cost trigger, uh, the gross revenue is shared 50/50. So 50 percent of that extra gross revenue would go to the landlord, 50 percent would go to the operator. If the gross revenue is below that cost trigger, then there’s no bonus. In about half the time from 2007 to 2024, there was not a bonus. About half the time, there was a bonus.

James Mintert: State it another way, Michael, there’s a reason why you set the base at 90 percent and shared 50/50 is because it looks

Michael Langemeier: Yes.

James Mintert: On the surface, like it’s a relatively equitable arrangement.

Michael Langemeier: Yes. Now when I was setting these up, I tried to make, I tried to make all three of these leases relatively comparable on a net return basis.

James Mintert: Over long periods of time.

Michael Langemeier: Over a long period of time.

James Mintert: So let’s talk about simulating this over the 2022, the 2023, and the 2024 crop years. We, you’ve got longer estimates than that, but we’re gonna focus on those three years just ’cause they’re in recent history here.

Michael Langemeier: Yeah, these are kind of interesting years, if you will. Uh, particularly ’22 contrast with the other two. For ’22 is a good, a very good net return, uh, to. land period. In fact, we had a very strong gross revenue for both crop price and and and yield reasons.

But in this case, the fixed cash rent was $289 per acre. Average productivity land in West Central Indiana. The base rent was 260 or 90 percent of that market cash rent. Uh, the revenue was about $100 higher than the cost trigger, which is non land cost plus base rent. And so, uh, to calculate the bonus, you take that 100 of extra revenue, multiply it by 50%, and the landowner got about a $50 bonus. And so we add that to the base rent, uh, the landowner got $310 per acre rent, in this case. rather than just 289. So you got about 20 extra rent in 2022. 2021 was even even a higher bonus than 2022.

Todd Kuethe: So just also to be clear, what do you when you think about these, uh, flexible agreements, when do you think those payments should occur? Or when do you observe those occurring in terms because a lot of times here in Indiana we do, sort of split, you know, 50 before planting, 50 after harvest kind of idea.

Michael Langemeier: Yeah, we were talking about this before the podcast and Jim what you were mentioning I think a very logical way to split this is, you know, if you have a fixed cash rent you might split it in two So, uh, you know two different payments. Well, you could do the same thing here. You can split the base rent in two and then the bonus is on the second payment.

Now one of the things that’s really important to think about when you’re doing a flex lease is when you’re setting that price, I would not set it after December 31st. Set it in the same year as the crop was harvested. The reason for that is related to taxes. A lot of us are on a calendar year tax basis, and you wouldn’t necessarily want part of that rent, particularly the bonus, going into the next year. So that’s something to think about. So that second payment would probably be in, uh, December. Sometime like that.

James Mintert: Or if you do it, just be

Michael Langemeier: Realizing you’re doing it.

James Mintert: Be cognizant of what you’re doing there, right?

Michael Langemeier: And maybe just the bonus would be in that extra year.

James Mintert: Yeah, so

Michael Langemeier: You could do it that way.

James Mintert: But if you go down that path, recognize what you’re doing.

Michael Langemeier: Yes.

James Mintert: So that was 2022. What about 2023?

Michael Langemeier: ’23 and ’24 are very similar. You take 90 percent, 90 percent of the market cash rent. That’s approximately $250 for both years. But in this case, the revenue fell far short of the of the of the cost trigger. So there’s no bonus. And so in those particular years, the landowner got the base rent, which was $250.

James Mintert: So you’ve taken a look at the comparison of net returns for a crop share lease and a fixed cash rent lease from a landlord’s perspective. And that’s kind of illuminating to see the difference there because those crop share returns are pretty variable.

Michael Langemeier: They’re very, they’re quite variable, uh, but they share the risk. They do the best job of sharing the risk, uh, but if you look at it from a land owner perspective in, in particular, uh, they’re, they’re quite variable. I mean, some years the, the, you get a lot more money than the fixed cash rent. Other years you might get a hundred to 125 dollars less than the fixed cash rent. And so they’re pretty extreme, uh, compared to fixed cash rent.

James Mintert: And you’ve also compared the fixed cash rent to returns from the flexible cash lease that you’ve already described.

Michael Langemeier: And again, if you look at these two slides, and I encourage you to do that, we’ve got, you know, they’re in the publication, uh, publication that we’ll talk about at the end. But when you look at these two slides, at first glance, you say, well, there’s not much difference between, uh, you know, comparing fixed cash to crop share and fixed cash to flexible cash.

Look at that fixed cash and flexible cash again. Essentially what that flexible cash rent is doing is it’s eliminating some of the downside risk. You still have that, those years, which is about half the years, where the base rent is below the market cash rent, so you’re, you’re dropping $25, $30 per acre. Lower lower rent in those particular years, but in the good years, you’re getting a higher, you’re getting a bonus. You’re getting a higher rent. ’21, for example, we had a bonus of about $140. And so you’re getting, you’re getting a cash rent in excess of 350, whereas the average was closer to 250.

James Mintert: So one of the most interesting charts in the publication, Michael, I thought was when you looked at the difference between returns to a fixed cash rent lease versus the flexible, uh, and versus the share rent. And that really highlights the difference between these two arrangements.

Michael Langemeier: Now you guys know that I, I like to talk about downside risk and I’m fairly risk averse. And so when I look at these, it’s a no brainer. The flexible cash rent lease has a lot less downside risk than the crop share lease. But again, there’ll be years where that crop share lease is quite a bit better than the flexible cash rent lease. But one of the things that this diagram illustrates again is something I mentioned earlier, how volatile, how variable that crop share lease really is. I mean, there’s years where you’re, you’re a hundred to $125 below the fixed cash rent. Whereas that flexible, flexible cash rent, you’re only only gonna be 10% below in any given year. That’s the minimum. That minimum is so important for the landowners that are really worried about downside risk.

James Mintert: Yeah, really smooths the returns.

Michael Langemeier: It really smooths them out.

James Mintert: Pretty dramatically. Let’s take a look at the bonus payments. You’ve looked at that going back to 2007 and. I think the first point that jumps out at me, Michael, is there’s a number of years, almost half. That the bonus payment is zero.

Michael Langemeier: Yeah, the way I thought about the bonus payments and again, these could be quite different depending on how you set the base rent, how you set the bonus. The way I think about this is you don’t necessarily want to pay out a bonus every year. This is really reserved for really good years when the gross revenue is really high. Another way of saying that is we all know that some years you have an economic loss. Uh, from a, from a budget and actual, uh, net return standpoint, some years you have an economic profit.

In those economic profit years, we want to, we want to have a bonus. In those economic loss years, we don’t want a bonus. And so that’s what this, this, uh, chart that looks at the bonuses is really doing. In those economic profit years, we’re sharing some of that profit. In the economic loss years, uh, the landlord is simply getting that base rent and gets no bonus.

James Mintert: So, to think about that in terms of, you know, how many years that took place, from 2007 to 2013, under this arrangement, we were generating a bonus payment. It varied quite a bit by year, but still, there was a positive bonus payment. From 2014 through 2019, there was no bonus payment. Then we had ’20, ’21, and ’22, we had bonus payments, with a very large one in 2021. And now in ’23 and ’24, we’re back to zero bonus payments. So that just kind of illustrates how this has worked out over the last, uh, what, 17 or so years, right?

[00:29:43] Conclusion with Additional Resources

James Mintert: So, all right, that kind of wraps up our podcast for today. Michael, you’ve alluded to this. There is more detail on the website. You’ve got an entire publication called "Comparing Net Returns for Alternative Leasing Arrangements", which you actually publish every year. The most recent update is just a few weeks ago.

Michael Langemeier: Usually in August, I put, add another year to it and do the comparison again. And, uh, it’s always, it’s always interesting because, because we know rents, rent, rents and net returns, uh, vary quite a bit from year to year. So it’s always interesting to see what the latest year’s results.

James Mintert: So you can get that on the website. When you go to the website, which is purdue.edu/commercialag, just click on the menu that says series, that’s a drop down menu, and then select the Leasing Land series, and this article that Michael was just referencing should pop up number one.

Michael Langemeier: Another couple publications at leasing land series that you might want to take a look at here. Uh, I have a, I have a publication on the importance of communication. I also have a, also have a short piece on what should be in a, in a landlord report. I encourage operators to have an ending, end of the year report telling them what went on during the year. I’ve got a publication related, related to that. And I also have some very short pieces on what do you do in cases where, uh, the, you know, the, the operator wants to put in tile drainage? How do we adjust the rental terms and how do we make sure that that gets paid for, uh, maybe by splitting the cost or something like that. And so that’s off topic for what we’re talking about today, but I did want to mention those are part of that leasing land series.

James Mintert: Yeah, good point. And Todd, your publication on Indiana Farmland Values and Cash Rental Rates also available on the website? Tell us where they can find that.

Todd Kuethe: Yeah, that’s, uh, also on the website for the publications drop down menu. And you can just select, uh, Indiana farmland values and cash rental rates. We have, uh, the current one, but we also have all the archived ones in case you want to, uh, fill in on the years you missed.

James Mintert: And we get calls for that periodically. There’s a lot of reasons why people necessarily want to go back and look at some of the older data and it is on the website. So

Todd Kuethe: A lot of sort of estate planning, intergenerational things. Uh, people will occasionally want to refer back to that.

James Mintert: A lot of reasons why people want to tap into that. So, um, if you’re listening to this podcast on the website, you can also subscribe to it on your favorite podcast provider. Uh, just do so by searching for Purdue Commercial AgCast.

And with that, I want to thank my colleagues, Dr. Michael Langemeier and Dr. Todd Kuethe for joining us today. On behalf of the Center for Commercial Agriculture. I’m Jim Minter. Thanks for joining us.