Ag Navigator Farm & Risk Management Solutions and Real Estate

What is a profit share lease?

A profit share lease is an agreement to create a fair partnership where a landowner and a farm operator work together to create a profitable relationship where each one provides necessary inputs into a farming operation and share the rewards. In a profit share lease agreement the landowner contributes the land and the farm operator contributes the labor, equipment and farming expertise.

How does a profit share lease work?

The farm manager works with both parties to develop a plan for the farm including the crops to be planted and works with the farm operator to develop a plan for purchasing inputs. The key component to risk management in the profit share lease is a revenue guarantee provided to by the federal crop insurance program. A strong actual production history (APH) will provide the revenue guarantee to create a revenue floor for both the landowner and the farm operator which guarantees both a fair base cash rent and a fair base operation return for the equipment, labor and farming expertise provided by the farm operator. The farm manager working with the farm operator develops a cash flow budget for the upcoming farm season which includes an estimate of all input costs for the farm. The expenses will include such items as base cash rent, fertilizer, chemicals, crop insurance, freight, equipment and labor costs, irrigation costs, seed and anything else directly related to production of the crop. The income portion of the cash flow budget will include all revenue generated by the farm; this will include projected crop sales, USDA payments and other potential revenues such as hunting leases. In each case the farm manager will develop one cash flow projection using the minimum guarantees provided by the revenue guarantees provided by the federal crop insurance policy and one cash flow using the anticipated actual revenues and expenses. Based on the information determined from this planning the farm manager will work with the farm operator to determine a fair guarantee for the equipment, labor and expertise in growing the crop. The farm manager will also work with the landowner to determine the desired return on their investment in farm ownership. This will determine the base cash rent return that will become part of the cash flow for the farm operation. The total of all expenses including base cash rent, input costs and equipment costs should never exceed the total revenue guaranteed by the federal crop insurance policy. This also allows the farm manager to determine the level of crop insurance that is necessary for the farming venture.

How are profits shared?

The farm manager works with the farm operator to determine the appropriate split of the net profits between the landowner and the farm operator. This is all completed before farm operations begin. This split will be developed by reviewing the level of contribution of the landowner and the farm operator. In many cases the landowner may contribute labor such as irrigation support or providing some labor to the operation, in these cases the landowner may receive a relatively higher percentage of the net profits, actual examples in this situation have been from 50 to 67% of the net profits. In some cases the landowner may have little or no involvement in the daily operation of the farm. In these cases actual examples have been from 10 to 50% of the profit.

In other cases the landowner may hire the farm manager to do all of the operations of the farm without the benefit of working with a farm operator; this will require a higher fee for the farm manager but will result in 100% of the farm profits returning to the landowner.

What are the advantages to a landowner of a profit share lease?

· Share in profits of the farm during times of high profitability

· Have a guaranteed minimum revenue during times of lower profitability or in the event of a crop loss or poor market conditions

· Leases are sustainable and fair, the need to change leases to react to market conditions is eliminated

· Work with beginning farmers to create a sustainable way to transition the farm

· The opportunity to benefit other family members or non-profit causes you want to support by assigning all or part of the profit share to that beneficiary

What are the advantages to a farm operator of a profit share lease?

· Ability to create a fair long-term relationship with the landowner by using an agreement that creates encourages partnership with the built-in flexibility to adjust to market conditions

· The confidence to grow your farming operation without the risk of having long-term leases that are not reflective of market returns