[Federal Register Volume 72, Number 188 (Friday, September 28, 2007)]
[Proposed Rules]
[Pages 55105-55108]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 07-4755]


 ========================================================================
 Proposed Rules
                                                 Federal Register
 ________________________________________________________________________
 
 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
 ========================================================================
 

  Federal Register / Vol. 72, No. 188 / Friday, September 28, 2007 / 
Proposed Rules  

[[Page 55105]]



DEPARTMENT OF AGRICULTURE

Farm Service Agency

7 CFR Part 718

Commodity Credit Corporation

7 CFR Parts 1412 and 1427

RIN 0560-AH75


Cash and Share Lease Provisions for Future Farm Programs

AGENCIES: Farm Service Agency and Commodity Credit Corporation, USDA.

ACTION: Advance notice of proposed rulemaking.

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SUMMARY: This advance notice of proposed rulemaking seeks comments with 
respect to the manner in which so-called ``combination'' or ``flex'' 
leases are viewed by the Department of Agriculture in the 
administration of various programs that are administered by the Farm 
Service Agency (FSA) and the Risk Management Agency (RMA). This 
includes those programs of the Commodity Credit Corporation (CCC) that 
are administered by FSA on behalf of CCC and those programs of the 
Federal Crop Insurance Corporation (FCIC) that are administered by RMA 
on behalf of FCIC. Changes have occurred within agriculture that relate 
to the types of leases. A traditional crop share lease is a lease where 
the landlord receives a share of the crop production in full 
satisfaction of the rent. A traditional cash lease is a lease where the 
tenant pays the landlord a set cash amount regardless of the quantity 
of the tenant's production of a crop. New types of leases may contain 
traits of both a share lease and a cash lease. Accordingly, existing 
program provisions may not accurately and appropriately take these new 
lease types into consideration.

DATES: We will consider comments that we receive by November 27, 2007.

ADDRESSES: We invite you to submit comments on this advance notice of 
proposed rulemaking. In your comment, include the volume, date, and 
page number of this issue of the Federal Register. You may submit 
comments by any of the following methods:
    E-Mail: [email protected].
    Mail: Director, Production, Emergencies, & Compliance Division, 
Farm Service Agency (FSA), United States Department of Agriculture 
(USDA), STOP 0517, 1400 Independence Avenue, SW., Washington, DC 20250-
0517.
    Fax: Submit comments by facsimile transmission to (202) 690-2130.
    Hand Delivery or Courier: Deliver comments to the above address.
    Federal eRulemaking Portal: Go to http://www.regulations.gov. 
Follow the online instructions for submitting comments.
    Comments may be inspected in the Office of the Director, PECD, FSA, 
USDA, Room 3752-S, South Building, Washington, DC, between 8 a.m. and 
4:30 p.m. Monday through Friday, except holidays.

FOR FURTHER INFORMATION CONTACT: Salomon Ramirez, Director, Production 
Emergencies and Compliance Division, USDA FSA PECD, STOP 0517, 1400 
Independence Avenue, SW., Washington, DC 20250-0517, (202) 720-7641, e-
mail: [email protected].

SUPPLEMENTARY INFORMATION:

Background

    The purpose of this advance notice of proposed rulemaking is to 
obtain comments with respect to the manner in which so-called 
``combination'' or ``flex'' leases are viewed by the Department of 
Agriculture in the administration of various programs that are 
administered by RMA and FSA, including those programs of CCC that are 
administered by FSA on behalf of CCC and those programs of FCIC that 
are administered by RMA on behalf of FCIC. In order to make timely 
decisions as to whether changes in program provisions are needed to 
reflect changes in landlord-tenant lease arrangements with respect to 
programs that may be authorized by Congress with respect to the 2008 
crop year.
    The desire to obtain comments on this matter is based upon several 
considerations for FSA and RMA programs.
    Significant changes are occurring within agriculture due to 
increases in land values, input costs, and commodity prices. In attempt 
to share the direct and indirect impacts of these and related costs, 
landlords and tenants have formulated leases that are neither a strict 
crop share lease (that is, a lease where the landlord receives a share 
of the crop production in full satisfaction of the rent) nor a cash 
lease (that is, a lease where the landlord receives a set cash amount 
regardless of the quantity of production of a crop achieved by the 
tenant). Rather, these new types of leases may contain traits of both a 
share lease and a cash lease. Accordingly, existing program provisions 
may not accurately and appropriately take these new lease types into 
consideration.
    FCIC crop insurance policies provide coverage to persons who have 
an insurable interest in the crop. Generally, a cash rent landlord does 
not have such an interest, but a share rent landlord does. Thus, leases 
that have attributes of both a cash lease and a share lease raise the 
issue of whether the landlord has an insurable interest and, if so, 
what percentage of the crop production should be considered to be 
insurable by the landlord.
    Over the course of the past 25 years, FSA has been aware of 
situations where non-traditional leases have been used by persons in 
attempts to avoid the impact of statutory payment limitation 
provisions. Generally, in the making of commodity program payments 
subject to these limitations, FSA looks to the division of crop 
production as specified in a lease to determine to whom these payments 
should be paid and accounted for under statutory payment limitation 
provisions. Thus, FSA takes these concerns into account in relation to 
the considerations listed above.
    FSA and RMA are engaged in efforts to have compatible, if not 
uniform, terms and conditions between our programs wherever possible. 
This is of particular importance with respect to the administration of 
FCIC crop insurance policies and the simultaneous implementation by FSA 
of the Noninsured Crop Disaster Assistance Program (NAP), where the 
same crop loss may trigger assistance under FCIC crop insurance 
policies and under FSA-administered programs.

[[Page 55106]]

Types of Leases

    Currently, for FSA and RMA programs, three categories of leases are 
considered: Cash leases, share leases, and combination leases.
    A cash lease is a lease in which the tenant agrees to pay to the 
landlord a set sum of money for the right to use specified land. A cash 
lease also includes those leases where an in-kind payment is made to 
the landlord for a specifically agreed upon quantity of an agricultural 
commodity and title to that quantity must be provided to the landlord 
by the tenant regardless of the quantity of crops produced on the 
leased land. In cash leases, the payment must be made regardless of the 
quantity of crops produced on such land and without regard to the price 
received for the production of the commodity. The payment of the rent 
may be made at anytime during the year, either before or after access 
to the land is provided by the landlord.
    A share lease is a lease in which the tenant agrees to provide to 
the landlord a specified percentage of the crops produced on the leased 
land. If there is no production, the landlord receives nothing in 
return for the use of the land.
    A combination lease is a lease that contains attributes of both a 
cash lease and a share lease. Examples of such leases would include 
those that provide:
     A fixed cash payment of $150 per acre plus 10 percent of 
the crop production from the leased land.
     A fixed cash payment of $150 per acre plus one-half of the 
bushels above 150 bushels per acre produced on the farm.
     A fixed cash payment of $150 per acre plus 10 bushels per 
acre if the crop produces above 150 bushels per acre on the farm.
     A fixed cash payment of $150 per acre plus $0.50 per 
bushel if the corn price received by the operator exceeds $3.50 per 
bushel.
     A fixed cash payment of $150 per acre plus $30 per acre if 
the gross revenue of the crop produced on the farm exceeds $500 per 
acre.
     A fixed cash payment of $150 per acre plus $30 per acre if 
the county average yield exceeds 150 bushels per acre.
     A fixed cash payment of $150 per acre plus $10 per acre if 
the Chicago Board of Trade futures for October delivery exceeds $4.00 
per bushel.
     A rental term where the landlord receives one-third of all 
crops produced on the leased land plus $25 dollar per acre if 
production is greater than 130 percent of the historical crop yield for 
the leased land.
     A rental term where the landlord receives one-third of all 
crops produced on the leased land plus $50 dollar per acre if the 
market price received by the tenant exceeds a set dollar amount.

Current Treatment of Leases by FSA and CCC in Provisions Applicable to 
Multiple Programs

    The FSA regulations in 7 CFR 718.2 defines a producer as an owner, 
operator, landlord, tenant, or sharecropper who shares in the risk of 
producing a crop and who is entitled to share in the crop available for 
marketing from the farm or would have shared had the crop been 
produced. A producer also includes a grower of hybrid seed.
    The Farm Security and Rural Investment Act of 2002 requires that 
the Secretary of Agriculture provide adequate safeguards to protect the 
interests of tenants and sharecroppers and provides for the sharing of 
payments for Direct and Counter-Cyclical Program (DCP) among the 
producers on a farm on a fair and equitable basis. The regulations in 7 
CFR 1412.402(a) define an eligible producer for DCP purposes as:
    (1) An owner of a farm who assumes all or a part of the risk of 
producing a crop;
    (2) A producer, other than an owner, on a farm with a share-rent 
lease for such farm, regardless of the length of the lease, if the 
owner of the farm enters into the same contract;
    (3) A producer, other than an owner, on a farm who cash rents such 
farm under a lease expiring on or after September 30 of the year of the 
contract in which case the owner is not required to enter into the 
contract;
    (4) A producer, other than an owner, on an eligible farm who cash 
rents such farm under a lease expiring before September 30 of the year 
of the contract. The owner of such farm must also enter into the same 
contract; or
    (5) An owner of an eligible farm who cash rents such farm and the 
lease term expires before September 30 of the year of the contract, if 
the tenant declines to enter into a contract for the applicable year. 
In the case of an owner covered by this paragraph, direct and counter-
cyclical payments will not begin under the contract until the lease 
held by the tenant ends.
    The regulations in 7 CFR 1412.504 currently outline provisions 
regarding the sharing of DCP payments, including the conditions upon 
which a lease is considered a cash or share lease. Program regulations 
do not prohibit the use of any type of lease agreement, but the type of 
lease arrangement determines who is eligible to receive a share of the 
payments. The regulations in 7 CFR 1412.504 provide the following:
    Each eligible producer on a farm will be given the opportunity to 
annually enroll in a contract and receive direct and counter-cyclical 
payments determined to be fair and equitable as agreed to by all the 
producers on the farm and approved by the county committee.
    Each producer must provide a copy of their written lease to the 
county committee and, in the absence of a written lease, must provide 
to the county committee a complete written description of the terms and 
conditions of any oral agreement or lease.
    A lease will be considered to be a cash lease if the lease provides 
for only a guaranteed sum certain cash payment, or a fixed quantity of 
the crop (for example, cash, pounds, or bushels per acre).
    If a lease contains provisions that require the payment of rent on 
the basis of the amount of crop produced or the proceeds derived from 
the crop, or the interest such producer would have had if the crop had 
been produced, or combination thereof, such agreement will be 
considered to be a share lease. The leasing of grazing or haying 
privileges is not considered cash leasing.
    If a lease provides for the greater of a guaranteed amount or share 
of the crop or crop proceeds, such agreement shall be considered a 
share lease if the lease provides for both:
    (1) A guaranteed amount such as a fixed dollar amount or quantity; 
and
    (2) A share of the crop proceeds.
    If the lease is a cash lease, the landlord is not eligible for 
direct or counter-cyclical payments.
    When contract acreage is leased on a share basis, neither the 
landlord nor the tenant shall receive 100 percent of the contract 
payment for the farm.
    CCC will approve a contract for enrollment and approve the division 
of payment when all of the following apply:
    (1) The landlords, tenants and sharecroppers sign the contract and 
agree to the payment shares shown on the contract;
    (2) CCC determines that the interests of tenants and sharecroppers 
are being protected; and
    (3) CCC determines that the payment shares shown on the contract do 
not circumvent the provisions of 7 CFR part 1400.
    These regulations do not prevent tenants and landowners from taking 
advantage of the various types of leases, including the combination 
leases,

[[Page 55107]]

available in order to adjust for the changing market conditions. The 
conditions set forth in the lease determine whether the arrangement is 
considered a share-rent or cash-rent situation for DCP program 
participation and dictates who is eligible to share in DCP program 
benefits.

Current Treatment of Leases by RMA and FCIC

    RMA and FCIS's Loss Adjustment Manual (LAM) Standards Handbook 
(FCIC-25010) provides the procedural guidance for verifying or 
determining the insurable share or interest of the crop being insured. 
The LAM is located on the RMA public Web site at http://www.rma.usda.gov/handbooks/25000/2007/07_25010.pdf. Within section 1, 
13 Verifying or Determining Insurable Share, of the LAM provides 
different scenarios for determining whether the arrangement is a ``cash 
lease'' or ``crop share lease'' between the landlord and tenant. Share 
arrangements may be written or verbal. The procedures for verifying or 
determining the insurable share are:

100 Percent Crop Share

    A 100 percent crop shares lease is a cash lease that includes 100 
percent share as owner or operator or land that is rented for cash, a 
fixed commodity payment, or any consideration other than a share in the 
crop.
    A lease that provides for either a minimum payment (including, but 
not limited to, a specified amount of cash, bushels, pounds) or a crop 
share is considered a cash lease (for example, lease provides for a 50/
50 crop share or $100 dollars, whichever is greater).
    A lease that contains a crop share, but the percentage is not a 
fixed amount at the time coverage begins is considered a cash lease. 
Such leases may contain a cash consideration with an undetermined crop 
share percentage at the time coverage begins.

Crop Share Lease

    In order to have a crop share, the crop share percentage must be 
specified at the time coverage begins and cannot change based on the 
amount of production harvested. For examples, see situations 4 and 8 
below.
    Written or verbal lease agreements containing provisions for both a 
minimum payment (including, but not limited to, a specified amount of 
cash, bushels, pounds) and a crop share is considered a crop share 
lease.
    The following nine situations provide examples of share 
arrangements, including both cash leases and crop share leases.
    Situation 1: The tenant (insured) agrees to give the landlord \1/3\ 
of the crop in return for farming the land.
     The agreement is a crop share.
     The insured's share is \2/3\ of the crop.
    Situation 2: The tenant (insured) agrees to give the landlord \1/3\ 
of all the crops produced on the premises and to guarantee that the 
landlord's share of the crops will average $35 an acre. In the event 
that the landlord's share of the crops is worth less than $35 an acre, 
the tenant will pay the difference in cash to the landlord.
     The agreement is a crop share.
     The insured's share is \2/3\ of the crop.
    Situation 3: The tenant (insured) agrees to give the landlord $50 
per acre cash and \1/4\ of the crop in return for farming the land.
     The agreement is a crop share.
     The insured's share is \3/4\ of the crop. RMA does not 
convert the $50 per acre cash payment to a share basis.
    Situation 4: The tenant (insured) agrees to give the landlord $50 
per acre cash and \1/3\ of all the bushels in excess of 60 bushels per 
acre. (Average yields for the area are usually around 55-65 bushels.)
     The agreement is a cash lease.
     The insured's share is 100 percent. The bushels in excess 
of the 60 bushels per acre are a ``bonus'' above and beyond the insured 
crop. The share percentage of the entire crop cannot be determined at 
the time coverage begins since it is dependent on how many bushels in 
excess of 60 bushels will be produced.
    Situation 5: The tenant (insured) agrees to give the landlord $50 
per acre cash and 10 bushels per acre.
     The agreement is a cash lease.
     The insured's share is 100 percent. RMA does not convert 
the 10 bushels to a percentage share. In this scenario the tenant will 
pay the landlord a fixed amount, cash ($50) and commodity (10 bushels 
per acre).
    Situation 6: The tenant (insured) agrees to give the landlord 
25[cent] for every bushel of peaches harvested.
     The agreement is a cash lease.
     The insured's share is 100 percent. Because there is no 
agreement for a set share percentage of the crop at the time coverage 
begins, the insured's share is considered a cash lease.
    Situation 7: The tenant (insured) agrees to pay the landlord $25 
per acre or \1/4\ of the crop, whichever is greater.
     The agreement is a cash lease.
     The insured's share is 100 percent. Since the lease 
contains an either-or type arrangement, the share is not considered a 
fixed element of the lease.
    Situation 8: The tenant's (insured's) lease agreement states that 
the tenant will receive the first 85 bushels per acre of corn produced. 
Of any bushels in excess of 85 bushels per acre, the tenant will 
receive 60 percent and the landlord will receive 40 percent. The 
insured's guarantee is 85 bushels and is based on the highest level of 
coverage that can be elected.
     The agreement is a cash lease.
     The insured's share is 100 percent. Since the insured 
receives the first 85 bushels and this amount is the insured's 
guarantee, 85 bushels is the maximum amount that could be insured under 
the policy.
    Situation 9: The tenant's (insured's) actual production history 
(APH) is 17.0 tons per acre. The tenant's lease agreement contains the 
following schedule:

------------------------------------------------------------------------
                                                Tenant's     Landowner's
               Tons  produced                     share         share
                                                (percent)     (percent)
------------------------------------------------------------------------
0-8 tons....................................            98             2
8.1-12.0....................................            96             4
12.1-16.0...................................            94             6
16.1-20.0...................................            90            10
20.1-25.0...................................            88            12
25.1 or more................................            85            15
------------------------------------------------------------------------

     The agreement is a share arrangement since there is no 
mention of cash.
     The base share is derived from the tenant's (insured's) 
APH. Therefore, the share percentage range for the insured's (tenant's) 
APH reported on the acreage report would be 90 percent. Since the share 
is to be established at the time insurance attaches and both still have 
a share in the crop at the end of the crop year, the share percentage 
established at the time insurance attached will be retained for 
indemnity and premium purposes.

CCC Noninsured Crop Disaster Assistance Program (NAP) Payments

    NAP payments are CCC payments made to producers in those areas 
where RMA policies are not available with respect to the specific crop 
produced by a producer. Specific regulations have not been defined for 
NAP regarding cash and share lease agreements. Generally, an eligible 
producer is determined according to the regulations in 7 CFR 718.2 and 
is based on whether the tenant or owner shares in the risk of producing 
the crop.
    As such, the regulations governing DCP with regard to cash and 
share lease agreements are not applicable for NAP.

[[Page 55108]]

Ad hoc Disaster Payments

    Historically, FSA has followed the determinations made by RMA for 
insured crops with respect to a given lease in that some disaster 
payments are simply an additional payment made by using FSA or CCC 
funds to simply supplement an indemnity payment made under an RMA 
policy. In those instances, FSA does not review the lease but simply 
issues a payment using a uniform percentage factor that is applied to 
the indemnity received by a person.
    For noninsured crops, FSA has followed the determinations made for 
NAP with regard to determining whether the tenant or owner shared in 
the risk of producing the crop.

Marketing Assistance Loans (MLA) and Loan Deficiency Payments (LDP)

    These CCC benefits are available only in the event that a crop is 
produced on a farm. In order to determine to whom such benefits may be 
made available, FSA makes a determination of whether a person has 
``beneficial interest'' in the production. Regulations in 7 CFR 1421.6 
and 1427.5, All Eligible Commodities Except Upland Cotton, and Upland 
Cotton, respectively, define beneficial interest as a determination by 
CCC that a person has the requisite title to and control of the 
commodity tendered to CCC as collateral for a marketing assistance loan 
or used to determine a loan deficiency payment. In order to have 
beneficial interest, a person must be the producer of the commodity and 
have had ownership and control of the commodity at the time it was 
planted through the earlier of the date the loan was repaid or the 
maturity date of the loan.
    In making this determination of beneficial interest, FSA takes the 
terms of a lease into account. Generally, the analysis of the lease for 
these purposes is the same as that used for DCP payments.

Cash-Rent Tenant Rule

    The ``cash-rent tenant rule'' is a current payment eligibility 
provision applicable to payments under multiple programs. It applies to 
any producer that rents land from another for cash or a crop share 
guaranteed as to the amount of the commodity to be paid in rent. If a 
producer is considered a cash-rent tenant under this rule, the producer 
is subject to an additional requirement that may make the producer 
ineligible for payment even though the producer otherwise meets the 
requirements to be considered ``actively engaged in farming.''

Impact on Small and Beginning Producers

    Renting land under a flexible lease may be advantageous for a small 
or beginning producer because risks are shared with the owner. Changes 
to policies related to leases need to ensure that small or beginning 
producers may benefit from flexible terms and receive all of the direct 
and counter-cyclical payments on a farm for which they would otherwise 
be eligible.

Request for Comments

    FSA and RMA are reviewing current regulations to determine the 
feasibility of developing a standardized regulation for defining cash 
and share lease agreements, including the conditions upon which a lease 
shall be considered a cash or share lease.
    Accordingly, FSA and RMA are soliciting comments with respect to 
the manner in which lease agreements are viewed by the Department of 
Agriculture in the administration of various programs. Specifically, we 
request comments that would facilitate the implementation of terms and 
conditions that treat a lease in the same, to the maximum extent 
possible, and still are consistent with FSA and RMA program 
requirements. Comments should address the following questions:
    1. Should combination or flex leases be treated in the same manner 
for all FSA/CCC and RMA/FCIC purposes? Explain.
    2. What adverse consequences or inequities result from treating 
combination or flex leases as share leases for FSA/CCC program 
purposes?
    3. What adverse consequences or inequities result from treating 
combination or flex leases as either cash or share leases, depending on 
the terms, for RMA/FCIC purposes?
    4. How can FSA/CCC ensure that combination or flex lease provisions 
are not being used to circumvent payment limitation provisions?
    5. What measures should FSA/CCC take to protect the interests of 
tenants and sharecroppers?
    6. What should the rule for treatment of combination and flex 
leases be?

Executive Order 12866

    This advance notice of proposed rulemaking has been determined to 
be not significant under Executive Order 12866 and has been reviewed by 
the Office of Management and Budget.

Thomas B. Hofeller,
Executive Vice President, Commodity Credit Corporation Administrator, 
Farm Service Agency.
Eldon Gould,
Administrator, Risk Management Agency Manager, Federal Crop Insurance 
Corporation.
[FR Doc. 07-4755 Filed 9-27-07; 8:45 am]
BILLING CODE 3410-05-P