Impacts of Rental Arrangements on Cover Crop and Conservation Practice Adoption

Rental Arrangements in Illinois

Incentive issues will be influenced by rental type. For farmland that is not owned, four control methods predominate:

Cash rent:Share rent:Flexible cash rent: A flexible cash rental arrangement is a modification of a cash rental arrangement. The rental payment typically equals a percentage of crop revenue with a minimum or base rent level specified. For example, a fairly typical arrangement in northern and central Illinois is a minimum rent of $200, with a higher rent possible if revenues are high enough for the share to exceed the minimum base level. For corn and soybeans, 33% and 40% revenue shares are fairly typical. USDA estimates that less than 10% of rented farmland in the Midwest uses flexible leasing arrangements (Bigelow et al.).

Custom farming: A custom farming arrangement has the landowner paying all costs and receiving all revenue from a parcel of farmland. In addition, the landowner pays a farmer to perform all field operations. According to Iowa State’s custom operation survey, the usual payment to the farmer for custom operations is about $120 per acre. USDA estimates that one to two percent of farmland in the Midwest is operated using custom farming arrangements.

Prevalence of Leasing Arrangements in Illinois

While the above statistics from USDA provide estimates of averages for the Midwest, Illinois’ land tenure and rental arrangements are unique. Illinois has more of its farmland rented than other states, with 60% of the farmland rented according to the 2017 Census of Agriculture. Grain farms in Illinois Farm Business Farm Management Association (FBFM) tend to be larger than “average” farms and have more of their farmland rented, 80% for FBFM farms compared to 60% for the USDA state average (see farmdoc Daily, July 6, 2021, for more discussion). Given the relatively large share of rented farmland and other factors, the use of leasing arrangement types also likely vary in Illinois from Midwest averages.

There are two sources of the prevalence of rental arrangements in Illinois. The Illinois Society of Professional Farm Managers and Rural Appraisers surveys its members each year. According to the 2021 survey, professional farm managers used the following arrangements on professionally managed farmland in 2021 (see Land Values publication of the Illinois Society):

• 41% used cash rental arrangements,
• 31% used share rental arrangements,
• 22% used variable cash rents arrangements, and
• 6% used custom farming

Incentive Issues on Rented Farmland

Incentive Issues with Cover Crops

Similar to lime, compatibility issues arise with adopting conservation practices, with uncertainties and risk further adding to incentive issues. Cover crops are a prime example. In the initial years of planting, the costs of planting and terminating cover crops often are not offset by higher yields or reductions in other costs. Net cover crop costs often are around $25 per acre in the initial years of plantings. In central Illinois, the average return to cash rent farmland from 2016 to 2020 averaged $52 per acre (data from Revenue and Costs for Illinois Crops). A $25 net cover crop cost represents almost half the farmer returns from a cash rent acre. Future economic benefits to the farmer and landowner may accrue from the continued use of cover crops, but those benefits are not well documented. Compared to the lime example where benefits are well known, farmers and landowners may be reluctant to adopt cover crops because of uncertainties of benefits. Tenure and leasing arrangements will further impact adoption decisions.

Owned farmland:Share rent farmland:

Cash rent farmland: Under most cash rent arrangements, the farmer will bear all the costs of the cover crop. Theoretically, all benefits will then accrue to the farmer in the future. However, the farmer likely will be more reluctant to use the cover crop for two reasons:

1. The farmer has the same rental uncertainty as in the share rent situation. As a result, the farmer may be more reluctant to place cover crops on cash rented farmland.
2. The farmland rental market is competitive. If there are benefits in the future from cover crops, it is likely that cash rents will increase as those benefits become apparent. As a result, farmers could bear all the costs of cover crops and receive less of the benefits because of rising cash rents.

Given a choice, a farmer is much more likely to plant cover crops on owned farmland, where future benefits are more assured to flow to the farmer. Depending on the cash rent landowner, farmers may be more reluctant on cash rent farmland than on share rent farmland. If the landowner desires higher rent levels, the probability of adopting cover crops declines.

Variable cash rent farmland: Variable cash rent arrangements have a blend of the characteristics of share and cash rent. Unless some other arrangement is made, the farmers will have to pay all the costs on variable cash rent farmland. At most, the farmer will only receive a percentage of future benefits from cover crops, as the farmer pays a percentage of crop revenue to the landowner. As a result, farmers are less likely to adopt cover crops on variable cash rent farmland as compared to share rent farmland.

Implications and Policy Recommendations

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