FR Doc 07-4755

[Federal Register: September 28, 2007 (Volume 72, Number 188)]
[Proposed Rules]
[Page 55105-55108]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28se07-29]

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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.

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[[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: Salomon.Ramirez@wdc.usda.gov.
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: Salomon.Ramirez@wdc.usda.gov.

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