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Rent, or share?

Innovative rental agreements are as cyclical as rental rates

The popularity of renting farmland has risen in Canada in the last 30 years. In 2011, 61.5 per cent farmland was owned and 38.5 per cent was rented out, according to Statistics Canada.

Proportionately, the West rents more, although rental levels were high across the country: 29 per cent in Ontario, 34 per cent in Manitob, 36 per cent in Saskatchewan, 40 per cent in Alberta, and nearly 44 per cent in B.C,

What is identical across the country, however, is that the lease rates on those property rentals depend heavily on farmers and what they’re willing to pay.

When producers weigh their bids, they’re taking into account their cost of production and also expected revenues, with the latter based on anticipated yield and crop prices. The quality of the land and expected input prices are additional factors.

Farm Credit Canada’s James Bryan adds that interest rates can have an impact on both rental and farmland values. Higher interest rates can boost the returns on safe assets like farmland, as well as bonds and money markets.

“As interest rates go up, it should be putting upward pressure on rental rates,” says Bryan, based in Regina. “But that doesn’t mean they will go up, because if producers are bidding on their cost of production, if they can’t afford it, they should have a max bid and stick to that.”

The price of farmland, though, takes into account broader considerations than rental rates.

“In addition to factors that influence rental rates, farmland values may reflect expectations regarding interest rates, government payments, and future non-ag uses of the land like residential housing,” says Brady Deaton, ag economist at the University of Guelph.

Share agreements can balance farm risks and profits, but will the landowner go along?

Deaton explains that farmland values are also based on the expected net returns to the land parcel in future years, not just the coming one.

Rental rates and farmland values are expected to move in similar directions, though there are a number of factors which may influence farmland values in a more pronounced manner than rental rates, as cash rental rates involve much shorter expectations than farmland values. The cost of renting climbed from 2009-10 to 2012-13, but in jurisdictions like southern Ontario, it hasn’t risen at the same rate as farmland values, Deaton says.

“Though rental rates appear to have appreciated over the last couple of years, I don’t think they rose in the meteoric fashion that land values have,” says Deaton.

The majority of rental contracts are for cash and a term of one year, although the relationships between renters and landlords extend longer than that. In southern Ontario, farmers typically rent from the same landowner year after year for, on average, close to 10 years, Deaton says.

There are also cash rental contracts with a bonus, in which a farmer’s rent would increase if crop prices or his yields hit certain levels, says Bryan. But he believes those kinds of flexible cash rental contracts are rare.

Sharecropping in Canada and the U.S. has become less common over the last 30 years, but that’s just the sort of contract that could take into account changing circumstances for farmers, Bryan says.

“Sharecropping is actually one of the easiest ways to allow the rental rate to fluctuate with increased commodity prices and yields.” Bryan says. “But at the same time, we have to remember that for lots of people, if they aren’t familiar with farming and don’t know the risks of farming, they might not be comfortable with a share lease.”

Data is scarce on who the sharecroppers are, but most analysts believe they tend to be landlords knowledgeable about agriculture. An urban-dwelling landlord might not understand the discrepancy in paycheques from one year to the next.

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Richard Kamchen

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