As farm leases are re-negotiated for 2013, one of the discussion points that might enter into the discussion is how a crop share or share rent land owner can participate in crop insurance. A cash rent landowner has nothing to be concerned about, because he will get his cash rent whether or not the operator has a crop. However, the increasing attention being paid to flexible cash leases, share rent leases, and even the old standard crop-share lease invites the crop insurance dynamic into the negotiations. It may be a way to compensate an owner at a higher degree of financial protection without the operator having to fork over more cash.
At a recent Land Value and Leasing Conference several speakers addressed the issue of crop insurance for farm land owners, and some with very creative ways. If an owner has a share in the risk of the crop, that allows eligibility for crop insurance, but that eliminates a cash rent owner. Most owners have not taken out crop insurance, but after 2012, that number will likely increase, as it will for most operators.
University of Illinois farm management specialist Gary Schnitkey calculates that many operators had crop insurance, but share rent land owners make up the majority of the 20% of acres that are not covered. And he says that means share rent land owners took larger losses than others. It may have resulted from their belief they were adequately compensated, but he says they probably did not have a crop insurance agent calling upon them. (That may change for 2013.) And Schnitkey says operators may be doing their land owner a favor by informing them of the opportunity and assist them in understanding the complexities. (After all, crop insurance is the only government safety net, and share rent owners will no longer be getting any government payments.) And with loss of government payments and lower income from share rent without the benefit of crop insurance, some land owners may shift their property into the cash rent category.
If a variable cash lease provides for a bonus to the land owner if crops, prices, or both exceed a certain level, the land owner is rewarded. But most operators have likely not included crop insurance indemnity checks in the revenue calculation, since the operator paid the premium for the insurance. If crop insurance made up the majority of revenue from a farm, Schnitkey says the share rent owner fared much worse than the operator. And he says that has led to consideration of where crop insurance proceeds should be factored into the leasing discussion.
But how do you do that?
Buying insurance for enterprise units—insurance all of the acreage in a given county—has become a popular choice for many operators. However its simplicity and efficiency would be lost if an operator had to buy insurance based on individual owners, and would increase the cost to the operator. Subsequently, Schnitkey suggests a two-step arrangement with the owner and operator:
- First, a crop insurance product could be simulated for inclusion in variable cash rent arrangements. Historical yields and projected prices could be used to set guarantees and actual yields and harvest prices could be used to establish revenue. The simulated crop insurance proceeds could then be used in calculating bonuses.
- Second, the minimum cash rents should be lowered in recognition that the farmer is now providing the landlord crop insurance, and the farmer should be compensated for providing this insurance.
Share rent land owners have likely not benefitted from crop insurance, as have operators, but operators who suggest such a program may be doing themselves a favor with longer tenure, or avoiding a switch to cash rent. There are creative ways to structure share rent leases to include either a simulated crop insurance payment, or assisting the owner in obtaining their own crop insurance policy.
Source: FarmGate blog