Farmland is a uniquely positioned investment. With the demand for food and fiber products continuing to grow, we have seen the capital appreciation for farmland consistently increase for decades. However, the increase in market price is not the only source of return when one invests in farmland. Land lease agreements and sources of residual income can greatly impact the potential return on investment for landowners.
Cash rent agreements are the most common leasing option and most popular with risk-averse land investors. In these agreements, the landowner rents the land to a farmer for a set price per acre; typically paid in one or two payments prior to the growing season. The farmer is responsible for all inputs but receives all profit at the end of the season. Some partnerships may choose to add in a flex-lease option, in which a base rent price is set, but may gain an additional premium given the performance of the crop.
This agreement is more of an investor/farmer partnership and it can be adjusted based on each parties’ preferences. It presents slightly more risk than crop share, however can result in increased return. Responsibility of inputs are determined by the parties, as well as the percentages of profits received. For a more hands-off investor approach, an agreement may look like this: The farm is responsible for all inputs and labor. At the end of the season, the farmer receives 60-70% of profits and the investor receives 30-40%.
This agreement presents the landowner with the most risk, but also provides the potential for the most return as they receive 100% of the profits. The landowner is responsible for all inputs treatments, seed etc. and will then hire someone at a set rate, usually per acre, to grow/manage the crops.
On top of the profits from crop production, there may be other opportunities to gain residual income from the land. Recreational leases, renewable energy sources, advertising, and communication/information towers are examples of ways to fully take advantage of the versatile asset at hand. If your land features waterways, forested areas, or hills/ditches, it may be optimal ground to lease out hunting or fishing rights. If your land butts-up against an interstate or high-traffic road, it may be perfectly positioned for advertisements such as signage or billboards.