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Farmland for rent

Too often it seems you don’t hear land is up for rent until you learn someone is already renting it

It isn’t like commercial real estate, or even like housing markets where so much information is available. If you’re interested in a house, for example, your realtor can tell you what the last six houses sold for in the same neighourhood. If you want to rent office space in downtown Calgary or Toronto, finding out the prevailing vacancy rate and rents is a relatively simple thing.

But if you want the same sort of information on farmland rentals, you’ll have to look long and hard for it, and you’ll likely still be disappointed, according to one land rental specialist.

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Ted Nibourg is a business management specialist with Alberta Agriculture and Forestry (AAF), and he spends a lot of time talking to landowners and tenants about farmland rentals.

“We just don’t have the same sort of metrics in agriculture,” Nibourg says about the dearth of information.

It’s not just an Alberta problem either. This is the reality across the country, according to Farm Credit Canada’s chief economist, J.P. Gervais, who says it’s more art than science when it comes to determining what the rent on a piece of land will be.

“There is no clear repository of this kind of information. You can really only get a bit of a sense of it talking to individuals about what they’re doing,” Gervais says.

Besides, Gervais adds, “A lot of different information, often unique to each farm operation, goes into the determination of what they’re willing to pay to rent a piece of land.”

Steady so far

It was hardly surprising that land prices and land rents shot up over the past five years. Both had stagnated through the commodity doldrums of the 1980s and 1990s, and when crop prices finally did advance to new heights, land values got pushed up along with them.

In 2016, however, this thinking would tell us to expect rental prices to fall, since crop prices have retreated from those dizzy heights.

But there’s no evidence of it, Gervais says. “Right now I would say rental rates are holding steady to edging higher,” Gervais says.

In no small part that’s because the devaluation of the Canadian currency has shielded grain producers from so much of the impact of lower international prices, with the loonie losing nearly a quarter of its value. When your grain is priced in U.S. dollars, that math works for you. Prices might be down, but nowhere near as much as they would be if we didn’t have this built-in shock absorber.

“If 2015 — we only have the first nine months data now — isn’t a record for farm cash receipts in Canada, it won’t be far off it,” Gervais says. “We don’t have any hard numbers for 2016 yet, but it’s probably going to be very good too, if our dollar remains where it has been, around 75 cents U.S.”

That means Canadian growers who signed long-term rental agreements at healthy prices aren’t under the same pressures as, say, their counterparts in the Iowa countryside, where there is no currency effect to soften the blow.

“In the U.S., there’s a significant softening of the agriculture economy,” Gervais says. “We’re not feeling it here in the same way, and the reason we’re not is really a Canadian dollar story.”

Land appraiser Ryan Parker, of Valco Consulting at London, Ont., agrees there’s little to no evidence that farmland rental rates are dropping.

“In light of lower commodity prices, that’s somewhat baffling,” Parker says.

He also stresses that any impressions of rental rates from any observer are exactly that — impressions.

“Some have a bit of paperwork involved, many are just straight handshake deals,” Parker explains. “There’s no way to find six comparables for farmland renting. You’re left with, ‘well, I heard these guys are getting this, and those guys are getting that.’”

Impressions to date, however, do suggest that the rental market for farmland is taking a breather from rising rents, but continues to hold its past gains.

“In a lot of cases I think farmers are working on a cost-averaging model, though calling it a true model might be a bit of a stretch,” Parker says. “They’re combining rental arrangements from today where they might be paying more than prices would justify, with a deal from 15 or 20 years ago, where they probably paid a bit less than market rate.”

In the short term, taking on more land that won’t necessarily pay for itself might still be a winner in the farmer’s eyes in that light, especially if it allows them to spread fixed costs and labour costs over a larger land base. Maintaining a land base of a certain size often necessitates that sort of decision-making, Parker explains.

It’s rolling forward a few years that makes the picture murky. Land rental rates tend to be sticky, but if the period of low grain prices persists, farmers and landlords may be forced to take that into account eventually.

Parker notes that land prices fell at one point in the 1980s during the farm crisis of that era. “What’s less clear — and I don’t know if anyone has the answer to this — is whether land rental rates fell during that period as well,” he says. “I suspect they did.”

Not just numbers

AAF’s Nibourg describes a good rental arrangement that sounds a lot like a good interpersonal arrangement of any kind. It starts with respect for the other person and understanding where they’re coming from, and builds from there, going well beyond just raw numbers. In fact, he says one of the most common jobs these days is educating landlords who might be a couple generations removed from the farm on the realities of the agriculture economy, and disassociating them from a straight numbers approach.

“These folks will come in with the mindset that they want to see the same sort of return on investment they’ll get somewhere else, say five per cent,” Nibourg says. “If they’re talking about land that’s worth $3,000 an acre, that’s a cash rent of $150, and they’re just not going to get that.”

Some come to understand that in agriculture returns tend to be low — something on the order of two per cent — and that the real gains come in the form of increasing land values over time. Others decide they haven’t the appetite for this business and would be better off getting out.

“I actually convinced a couple of ladies to sell their land,” Nibourg says. “They came to the conclusion that was just better for them personally.”

For the ones who do stick around, Nibourg recommends a few straightforward starting points. The first is understanding exactly what the true productive capacity of their land is. In many jurisdictions, including Alberta, a legal land description can give the landowner crop insurance data that gives a clear picture of that.

“Taking that information, I then look at a four-year rotation — canola, maybe a couple of years of wheat, and barley — and look at what that would translate into as cash receipts,” Nibourg says. “That can give a pretty sound starting point for negotiations. But just saying, ‘I have the best land in the county,’ doesn’t really tell me anything.”

From there it’s a question of finding a spot where a willing renter and a willing landlord can come to an agreement. He tells both parties when he has a chance that the right answer is probably not going to be scooping up every last cent. If you want to build a long-term, stable renting arrangement, a bit of empathy running in both directions goes a long way.

“The people who tend to have these long-term arrangements are people who are willing to leave a little something on the table for the next guy,” Nibourg says.

The intangibles also come into play. For example, what is it worth to you to deal with someone you know you can trust? Quite a bit at times, according to Nibourg. More than once a landlord has gone through the exercise of pencilling out the rental value, based on the land’s productivity, and been a little surprised at the results.

“They’ll say, ‘Well, that’s a bit more than I’m getting now, but I’ve been doing business with this person for 20 years, and they’ve never ripped me off yet — I think I’ll stick with them’,” Nibourg says.

As with so many things in agriculture it’s partly a question of reputation. Consider the way land tends to hit the rental market. Sure, now and then you might hear about a tender going out, or see an advertisement. But the majority trades quietly, with a landlord giving a prospective tenant a call one evening and saying, “I have a quarter section I thought you might be interested in.”

“These are small towns, and there’s a saying I like to remember: ‘If you don’t know what you’re doing, somebody else does,’” Nibourg says. “I know renters have told me they’ll look around the hockey rink, see the person who’s always shouting at the referee, and think to themselves, ‘I don’t know if I want to get involved in that.’”

Growing issue

One thing that is clear is that getting rental arrangements right is becoming more important with each passing year.

Recent FCC estimates peg rented farmland at 40 per cent of Canada’s total acreage, and on many of the largest farms, rented land comprises the majority of their land base.

Gervais says growers frequently need to walk a tightrope when making rental arrange­ments. Nobody likes to sign a deal that won’t be immediately profitable, but competition for land can be intense and growers also can’t afford to either miss opportunities or lose their land base.

“It really is a delicate balance that they have to strike,” Gervais says.

One thing any renter should know is just how big the range of rental rates are. A 2012 study funded by the Saskatchewan Ministry of Agriculture looked at nearly 1,500 cash rental arrangements and about 500-crop share deals, none between immediate family members.

The company hired to do the survey found an astonishing range of rental rates, ranging from an almost unbelievable low of $6.25 an acre to a high of $140.60 an acre. On average, the rate was $35.65 an acre across the province, with a significant variation through the province’s agricultural regions.

There also appears to be a significant variation in length of rental agreements. An Alberta study for 2011 and 2012 found just under half of agreements were for a single year. About a third were three-year contracts, with five-year deals in place on about a fifth of the contracts. After doing their homework on what’s going on around them, growers will need to look within their own operation for answers, Gervais says. “They will need to delve into their balance sheet and their cash reserves and decide just how much risk they’re comfortable taking on, how much of a ‘premium’ they might be willing to pay to rent that land.”

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