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Farmland rentals in Western Canada continue to rise

More and more acres are on the rental market, with land increasingly held by families exiting active farming

The number of acres of rented and leased farmland in Canada is going nowhere but up, and will keep being led by Western Canada, especially Saskatchewan and Alberta.

“I would expect that we’ll continue to see more people renting land for a number of reasons,” says Farm Credit Canada’s principal agricultural economist Craig Klemmer.

That’s what realtors are seeing on the front lines too. And, like many others, Dallas Pike, Hammond Realty’s farmland property management specialist in Saskatoon, explains it by pointing to climbing farmland values, and the fact that farmland has become such an attractive investment.

Others agree too. University of Guelph professor Brady Deaton says farmland can seem an ideal investment for non-farming owners — retired farmers, families of farmers, investors, etc. — because of rent revenue as well as price appreciation.

Just from the appreciation of land values alone, Ontario Ministry of Agriculture, Food and Rural Affairs (OMAFRA) chief economist Steve Duff doubts there’s a better return on investment than owning farmland.

“You’re talking a 30 or 40 per cent increase on an asset that, if you’re farming, it means you don’t get any capital gains. You’re not beating that return,” says Duff.

Trend lines

In 2016, Statistics Canada’s census showed 40.1 million acres in Canada were rented or leased, about one-quarter of total agricultural land. That had nudged up from 2011’s 36.8 million, which had accounted for 23 per cent of that year’s total farmland.

The census also showed it was happening all across the country, although the growth in rental numbers was steepest in the West.

“The increase in total land rented and leased was driven by Saskatchewan and Alberta in particular, but the other western provinces also saw significant growth in that form of tenure,” says Erik Dorff, analyst with StatsCan’s agriculture division.

StatsCan reported rented or leased land in Saskatchewan jumped from 14.7 million acres in 2011 to nearly 17 million in 2016.

Saskatchewan Agriculture noted that the 2016 census indicated over 59 per cent of farmers in the province lease at least a portion of their farmland, and that 37 per cent of total provincial farmland was under lease.

Alberta’s figures also rose. Nationally, Alberta ranked second to Saskatchewan in total farm area at 50.3 million acres, and saw rented or leased farmland rise from 11 million acres in 2011 to nearly 12 million in 2016.

So where has it gone since 2016? And why?

Retirement investment

Not surprisingly, StatsCanada has found that renting out land goes up with the farmer’s age. Young farmers rent little. By contrast, nearly a quarter of farmers over 70 rent out at least some land.

StatsCan says older farmers may rent out farmland to supplement their income, or scale back production while transitioning to retirement. It’s a finding that won’t surprise many in the ag sector.

The question now is whether that land is entering a phase of more or less permanent renting.

“A number of things underlie owners renting or crop sharing,” notes Dorff. “That can be financial considerations, sentimental ones, and keeping the farm in the family, even if not farming.”

Hammond’s Pike adds that when succeeding generations don’t return to the farm, a lot of retiring farmers used to sell off their land assets and eventually move to town. Now, they’re holding on to what they see as their best investment vehicle, and they’re renting it out instead.

In effect, says Sask Ag, rental income has become a kind of pension to be used while the main asset continues to climb in value.

It’s also flexible. The farmer can rent out a little or a lot, depending on how actively they want to continue farming. And if it doesn’t work out, or it turns out that they really do need the cash down the road, they can sell at that point.

The big question

For more of these farmers, the fly in the ointment may be that rental rates are climbing more slowly than farmland values, says realtor Tim Hammond.

“What this means is the overall return on investment, based on fair market value, has been slowly decreasing,” Hammond says. “We are also starting to see resistance for rental rates to go much higher. I don’t feel that is the case for land values, though.”

Hammond suspects Saskatchewan’s 37 per cent leased land is mostly owned — over 85 per cent — by retired farmers or non-active farm family members, but he’s also witnessed a renewed interest in farmland from investors since the COVID-19 pandemic.

It’s a surge he hadn’t predicted before the pandemic.

“With bond and interest rates dropping and looking like they are going to be there a while, the yield on farmland is looking more attractive all the time,” says Hammond. “It’s a relatively safe investment and there is still upside potential for capital appreciation, at least in Saskatchewan.”

Hammond, however, says he’d be surprised if more than a million cultivated acres in his own province are owned by corporate or outside sophisticated investors: “At most, it would represent three to five per cent of the overall land base.”

Numbers are generally similar in most regions, although each has its own specifics. Next door to Saskatchewan, for instance, non-family corporations in Alberta owned two per cent of all farms (803) in 2016, compared to 1.8 per cent (771) in 2011, according to census numbers.

Young farmers

Young families increasingly depend on access to rented land. The 2016 census reported that on farms where all operators were under the age of 35, 50.6 per cent rented land from others, compared to 35.1 per cent of all agricultural operations.

On agricultural operations that used only rented land, the average operator age was 46, or nine years younger than the national average, StatsCan said.

Renting and leasing creates opportunities for younger people getting into agriculture, as well as for more established farmers to expand their operations in a sustainable way, FCC’s Klemmer says. He says the hope of renters is to be able to purchase the land one day from the owners when it comes available.

Adds Pike: “These 60-, 70-year-old retiring farmers, they can be sitting on two to 4,000 acres. For a local guy to take that on and try and buy it outright, it’s a huge acquisition.”

Besides, money that’s sunk into land acquisition puts the squeeze on operating capital. It’s often more profitable to spend this money on seed, fertilizer, chemicals and machinery.

Renting in farmland allows farmers to scale up their production efforts without having to own every parcel they farm, says U of G’s Deaton.

“This may support longer-run efforts to expand the size of their farm through expanded ownership,” Deaton says. “That said, renting in some portion of farmland appears to be part of a long-term farm plan for many farmers.”

A different story in Ontario

Whereas Saskatchewan and Alberta have been leading the way in rising rentals and leasing rates, Ontario, in fact, saw its numbers fall in the 2016 census by over 203,000 acres to under 3.6 million.

Statistics Canada analyst Erik Dorff points to differences in agriculture between Ontario and Western Canada, with smaller operations in Ontario
that produce different commodities. Proportion must be considered,
he says.

“When you look at the ability to scale up, irrespective of any sector-specific considerations, if you’re large, out West, adding another quarter section, or two or three quarter sections… isn’t something you’re really going to bat an eye at,” says Dorff. “Adding the same amount of land to an Ontario or Quebec operation would be mind-blowing in most cases.”

OMAFRA’s Steve Duff adds that there’s a significant regional component to renting and leasing, both in Canada and within Ontario.

“Land rental is something that takes on the flavour of the region,” says Duff.

When it comes to Ontario’s dairy sector, for instance, the cap on quota values resulted in a lot of farmers using up excess cash on buying farmland instead of growing their quota base, he says.

“In some areas, that’s pushed the rental market down, because they’d rather own the land than rent it,” Duff says.

In other areas where there’s a greater prominence of cash crop operations, more growers are looking to buy and holding onto acres if they can get hold of large contiguous pieces of land, he says.

The strategy is to gain maximum control, Duff says. “They can make more money than if they were to rent.”

Cash is still king

When it comes to farmland rentals and leases, cash deals predominate, now more than ever.

Cash agreements grew faster than any other type of agreement as a proportion of all farmland rental agreements between 2011 and 2016, rising 10 per cent to 34 million acres, according to Statistics Canada.

Cash rent’s dominance comes down to being easy to manage, says Erik Dorff, analyst with StatsCan’s agriculture division.

“Cash on the barrel for both sides. You don’t have to keep track what went into that piece of property, and you don’t have to allocate risk between the two parties,” he says.

Adds Craig Klemmer, principal agricultural economist at Farm Credit Canada: “When you talk about second generations of owners, children of parents, they’re not looking to take on that risk, they’re just looking to have that security of what the returns are going to be.”

Klemmer also says the simplicity of cash rent makes it easier for landlords and renters to budget. As well, it simplifies administration for renters who have expanding operations and multiple rental and leasing contracts.

Competition for land is also driving the increase in cash rents. While some renters might prefer a crop sharing or other arrangement, land owners have the luxury of choosing the certainty of cash, according to Klemmer. That competition is also a hurdle in renegotiating rents in the event of market collapse, such as when western Canadian pulse producers were shut out of India’s market.

“There’s not a lot of leeway to try to negotiate a 10 per cent reduction in your farmland rental costs because there’s another farm there that’s ready to pick it up,” notes Klemmer.

The majority of Ontario rental arrangements are also cash-rent, but they aren’t associated with formal, legally binding contracts, notes Brady Deaton, professor of the University of Guelph’s food, agriculture, and resource economics department.

“The ‘hand-shake’ agreements characterize most farmland rental arrangements in Ontario,” Deaton says.

Crop sharing

Like cash, crop sharing agreements also increased between 2011 and 2016, but it was by a lesser extent, expanding three per cent to cover 4.5 million acres, StatsCan’s 2016 Census reported.

Although cash rent is a much more straightforward way of securing land for a producer than is crop share, Dorff says that crop share does represent a means to share downside risk and upside opportunities between the operator and the land owner.

“How those factors balance against straight cash payments alongside financial planning considerations for the parties contributes to the outcome we observe in the data,” Dorff says.

Saskatchewan Agriculture says recent common division ratios of crop sharing have been at 25 per cent/75 per cent or 20 per cent/80 per cent landlord/tenant ratios when there are no input costs paid by the landlord. But when input costs are shared, there had been a ratio of 33.3 per cent share of all crop sales to the landlord and 66.7 per cent share to the tenant.

“However, that is really more closely related to past, traditional agreements rather than purely economic considerations,” SaskAg reported.

Klemmer too has observed the shift away from traditional one-third/two-thirds agreements.

“With the price of equipment and operation costs, we’ve seen adjustments, which vary from place to place,” says Klemmer.

In Ontario, crop share leases are less common than cash or flexible cash rental leases. OMAFRA chief economist Steve Duff explains crop sharing is effectively gone as a tax option.

Other agreements

Canadian farm acreage covered by other, less traditional rental agreements fell six per cent between 2011 and 2016 to 1.5 million acres, StatsCan reported.

Land used under other arrangements is primarily in the beef cattle sector, which comes down to land maintenance, explains Dorff, with the idea being a farmer can use a piece of land or take hay off it in return for maintenance.

Duff notes alternative rents are quite commonplace in Ontario.

As an example, larger cash croppers in the province have been approaching owners of smaller pieces of idle land with the offer of refurbishing it. That might involve clearing, tilling and tile draining. In exchange, they use the land for an extended period.

“That’s been a really big thing, especially in central and eastern Ontario,” says Duff.

Length of agreements

Rental and lease agreement term lengths vary widely, by region, by sector, and even between landlords and tenants.

But for producers looking to pick up a large swath of land, they’re looking at long-term agreements for security, simply because of the extra investment they’ll be forced to make to farm those extra acres, according to Klemmer.

U of G’s Deaton says Ontario farmers have relatively long-term expectations about the land they’re renting.

A study he co-authored estimated that farmers expected to continue to rent the farmland they were presently renting for, on average, eight years. He points out many other studies confirmed his findings that landlord-tenant relationships were generally long-lived.

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