Cash Rental Agreements

 

While the current 2025 agricultural crop season is still in full swing; farmers and landowners are thinking about renewing or making new rental agreements. In Ohio, about 39% of farmland is leased or rented. About 28% of all Ohio farmers rent exclusively and own no farmland themselves. About 13 Midwestern universities have developed a program called AgLease 101 offering descriptions and advantages and disadvantage to landowners and renters (tenants) of various rental arrangements.

The most common rental agreements are cash rent. For the Landowner, the benefits include they do not need to provide much input to the farming operation. The landowner gets a cash payment that does not trigger landowner self-employment tax and does not reduce social security benefits at retirement. With less input, generally there is less disagreements between parties. The landowner does not need to worry about pricing the crop or yields or how to divide and market crops. The renter or tenant takes care of paperwork associated with government payments (FSA) and/or crop insurance.

For landowner, the disadvantage include negotiating an acceptable rental rate. Often the landowner has to be knowledgeable about current rates. Once a rate is set, it can be difficult to change if prices or costs change, a disadvantage for both the landowner and the tenant. In great years when prices and yields are high, the landowner would have a higher return on a crop share agreement. Cash rent comes at specified times in the contract, so for tax purposes, it harder to move the payments around to minimize taxes for the landowner. On short-term leases, keeping the land in good shape, keeping fertility high and conserving the soil can be more difficult than long-term agreements. If a landowner wants to pay into Social Security to get the benefits at retirement, its hard to show material participation to qualify on a cash rental agreement. Sometimes it may be difficult to get paid unless the rent is paid in advance.

For the renter or tenant, they also have advantages and disadvantages to cash rent. Advantages include usually the cash rent amount is set and known. The tenant has more freedom to make decisions and can strive to maximize yields. With less controversary, relations may be better. The tenant does not have to divide crops or keep track of dividing expenses. For the tenant, especially at todays prices for farmland, they have a lot less capital tied up in land; so they can concentrate on growing better crops.

The tenant disadvantages to cash rent include they are taking all the risk for changes in yield and price. This includes higher costs due to inflation for fuel, seed, fertilizer, equipment, and even labor. Cash rent is a fixed cost generally that may be difficult to pay when crops are poor, the prices are low, and inflation or the cost of production is much greater than expected. Cash renting a large amount of land for the tenant can be very risky. If a tenant loses acreage or competition gets really high, it easy to lose a farm and significant income. The financial security for tenant farmers may be quite variable and difficult to maintain during difficult times.

Other issues that can hurt the tenant farmer is that cash rental rates tend to trend upward as yields and prices increase. However, they are much slower to decrease after a couple of bad crops. What happens locally (poor weather due to hail, drought, flooding) can be totally different than what happens county wide, state wide, nationally, and even internationally. The farmer has no control over many factors. For a cash rent tenant farmer, they supply all the inputs: seed, fertilizer, fuel, equipment, labor plus the cost of renting the farmland. The tenant farmer assumes most of the risk. For USDA government payments, there are no limitations for payment to the landowner, but the tenant farmer, as they grow and get bigger, may be subject to more limitations.

For any cash rental agreement, the following information is needed. First, it is highly advised to have a written agreement to help settle disputes. The legal names of each party are required with an accurate description of the property. A beginning and ending date is needed. How much is the cash rent and the date or dates that cash rent is due needs to be stated. Each party must sign the document. Many landowners like to see regular soil tests and like to have the tenant’s provide them with basic yield information on their land. For typical cash rent agreements visit aglease101.org. Next week, a discussion of crop share rental agreements and other more involved rental agreements will be discussed.