For many operations looking to grow their farmland base, including young farmers, the cost of purchasing land is prohibitive,” says Leigh Anderson, a senior economist with Farm Credit Canada.
He says it’s not only the high cost of farmland that’s affecting young farmers’ ability to grow their land base, but strong competition in the rental market, which has elevated rental rates.
Lean years aren’t helping either.
“Lower grain and oilseed prices, and elevated input costs could result in negative margins on rented land or recently purchased land for most producers this year,” says Anderson.
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Older farmers with strong balance sheets and sufficient cash flow might weather low profit margin years, but such margins are a far greater threat to farmers just starting out, he says.
Crop sharing option
Crop sharing could be a good option for young and beginning farmers, Manitoba Agriculture’s Darren Bond says.
Although unable to benefit from land appreciation, crop sharing does provide lowered upfront capital costs of land, while sharing the downside risks associated with below average crops with the landowner, says the provincial farm management specialist.
Of course, the producer also must share the upside potential of above average yielding crops.
“However, this is often a quite acceptable trade-off considering the other options of trying to be competitive with more established farms with acquiring cash rents and land purchases,” Bond says.
Levi Derksen, senior manager with Buckberger Baerg & Partners LLP, demonstrates how farmer and landlord split the rewards and risks with his example that compares $100/ac. straight cash rent versus a 20 per cent crop share.
During a good year, if a farmer under such an agreement grosses $650/ac., the landlord would receive $130/ac. But during a poorer year, during which the farmer is only able to gross $350/ac., the landlord would receive only $70/ac., Derksen explains.
“With rising rental rates, a form of crop share or bonus rent based on revenue targets helps the farmer pay higher rental rates to access land, without being locked into a long-term cash rental contract that is unsustainable,” Derksen says.
Hammond Realty founder Tim Hammond says that crop sharing could be an option for a young farmer, but an expensive one.
He helped an investor purchase land at $400/ac. and secure a crop share arrangement in 2007. The next three years were good ones, and the landlord’s crop share came to around $100/ac. At the end of those three years, the tenant wouldn’t do another crop share.
“It was way cheaper just to guarantee the landlord $60/ac.,” Hammond remembers. “He was thankful for the acres and opportunity, but once that arrangement served its purpose — helping a young farmer get going — he switched.”
How it works
Under a crop sharing agreement, the percentage that the landowner receives typically ranges from 20 per cent to 33 per cent, Derksen says. This also depends on the crop mix and the quality of the land, he adds.
He says crop share deals are more common on poorer land, so that the risk of a poor crop is shared. Crop sharing is also more common in southwestern Saskatchewan, where the crops are more variable due to drought.
But Derksen says crop shares are less common in the black soil zone that has more consistent crops.
The actual split of the crop produced occurs at the country elevator, which writes a cheque to the landowner.
“There are a lot of variations,” Derksen says. “Some farmers pay out their crop shares directly to the landowners without splitting grain at the elevator.”
Hammond says that the logistics of splitting grain produced on crop-shared land can be challenging.
“Does it go across a scale or do you ‘eyeball’ it in a bin?”
Hammond says tenants aren’t required to pay until either their crops are sold or harvested, and notes some landlords take actual physical delivery of the grain.
“Cash is typically tight with a young starting farmer, so this is attractive. He can use cash in spring for inputs instead of rent,” says Hammond.
Another feature of crop sharing are the contributions both tenant and landowner make toward growing a season’s crops.
Anderson explains that the landlord provides the land and a portion of the crop inputs — such as seed, fertilizer, chemicals and crop insurance —– while the producer supplies all the machinery, labour and remaining inputs.
Trust and “good, open and honest communication” are vital for a crop sharing agreement to work effectively, according to Bond.
“If superior communication and trust can’t be established, simple cash rental agreements are preferred,” he says. “Many farmers feel simple cash rents to be easier to understand and administer, making them much more popular.”
The kind of trust landowners extend to their tenants crosses some significant variables.
“If the farmer contracted some grain at a lower price and some at a higher price, which price will the landowner receive for their crop share?” asks Derksen. “Does the crop share land get less fertilizer, no fungicide application and is combined last?”
Who’s doing it
Crop sharing remains almost a niche part of farmland rentals.
Anderson notes the last Census of Agriculture pegged the percentage of rented land in Canada that was farmed under crop sharing at only 8%. He says crop sharing can be complex and boils down to an individual’s risk preferences.
“Rental agreements must be tailored to the needs of both the producer and the landlord. Explore using crop share leases as another tool to mitigate risk,” Anderson says.
Perhaps surprisingly, it’s not just young farmers getting into crop sharing arrangements.
“Historically, some retiring farmers wanted to still maintain some farm income and connection to the land after they retired from day-to-day farm work,” Anderson says.
Adds Derksen: “I see it across all age groups. Retiring farmers are more likely to want a crop share as they understand the risks and rewards of a crop share arrangement.”
