What is the Right Lease Length for My Farm?

It would be nice to say there was one answer for every farm lease, but every farm and landowner/farmer relationship is different.

One of the most common questions we receive while conducting farmland insights reviews with landowners is, “Should I do multi-year leases or single-year leases with my farmer?”

It would be nice to say there was one answer for every farm lease, but every farm and landowner/farmer relationship is different. What works for one may not work for the other. There are benefits to both multi-year leases and single-year leases. 

Single-year Leases

Single-year leases allow for adjustment more frequently, working well for both parties in different ways. Farmers can show their landowners how the market has been moving over the year and that the profit potential of the farm is lower due to commodity prices falling. Annual data points are a great way to agree reasonably that the rent needs to be reduced if the profit potential has significantly shrunk. Conversely, that yearly discussion could also show that the profit potential of the farm has increased due to the commodity markets, and a reasonable agreement can be made that the rent needs to increase for the coming growing season. 

Multi-year Leases

When a farm is in a multi-year lease, a farmer could be stuck paying higher rent in a lower market, or a landowner could receive a lower rent in a higher profit market, especially with how volatile the commodity markets have been in recent years. For example, since July of 2020, corn prices have doubled; in July 2013, corn prices dropped by $2.00 per bushel from the July before. If these scenarios occurred during a multi-year lease agreement, they would be a catalyst for a lease’s set rent amount to be lower than it should be to be considered “market rent.” The profit potential on a farm can change by hundreds of dollars per acre in a matter of months. Even though that may make multi-year leases seem risky or unfair, they also have advantages. Multi-year leases can provide stability and certainty to both parties. 

If the farmer knows that they have the farm leased for multiple years, it allows them to plan for marketing and input purchasing. They can future contract grain sales at current prices to ensure they are profitable for the length of the lease. Inputs can be booked in advance, allowing the opportunity to receive more significant discounts and apply multiple-year fertilizer applications that will have a longer life. Suppose improvements or repairs are needed on the farm. In that case, farmers can do the work themselves or contract someone locally, knowing that they will benefit from the successful completion of that project for multiple years. 

Landowners who rely on the farm rental income to cover annual expenses such as healthcare costs, mortgage payments, or college tuition for their family members might also prefer multi-year leases. It lets them know that a specific income will be coming in for multiple years and will not change for the lease term. 

In summary, different lengths of lease terms fit different situations. 

  • If it is your first year in a leasing relationship, sometimes it is better to have a shorter lease term to ensure all parties involved are happy with the terms and working relationship.
  • Multi-year leases are great when an improvement project is needed on the farm, and the farmer can do the work themselves. 

The most important thing to remember is that an open and transparent conversation between the farmer and the landowner leads to a more beneficial relationship. Input prices have been very volatile recently, so the transparency of knowing the costs and income on your farm will lead to a more fruitful discussion. It is also important to remember that negotiating a lease should always be based on the farm’s potential for that next lease period and not the results from the previous year. 

If you are wondering if your current lease is what is best for you and your farm, schedule a free farm review with us.

We would love to learn about your farm and offer any insight.

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