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Sticky land rental rates

With other farmers bidding up 2014 rates, your only choice may be to go big or stay home

Grain prices have sunk, but it’s no news in farm circles that farmland rental values don’t look set to follow anytime soon. Nor, perhaps, should it be any surprise.

“If we look at the trends in rental rates versus crop receipts… rental rates go up slower than crop income, but then they also take some time to come down,” says James Bryan, an agricultural economist with Farm Credit Canada in Regina. “They’re sticky on both ends.”

In theory, when projected and actual returns begin to decline, so too should rental rates. But there are two caveats that can prevent this.

“If farmers perceive declines in commodity returns to be a short-term phenomenon, there’s no reason to expect rental rates to decline,” says Jared Carlberg, an agricultural economics professor at the University of Manitoba.

If farmers’ expectations are that commodity prices and, hence returns, to farmland, will increase, the opposite, in fact, will occur.

“Given excessive demand for access to land, I would expect to see no decline in rental rates,” Carlberg says. “The supply of land is fixed and there are many, many, many producers looking to get bigger. So quite aside from any normal variations in returns, rates could be expected to face upward pressure due to demand-side factors.”

Rick Dehod, a farm financial specialist with Alberta Agriculture’s livestock and farm business branch, says softening grain prices have spurred growers to talk about the high rental rates that have been negotiated in the province the last five years.

Even so, Dehod expects that with so many commercial farms looking to grow and capture economies of scale, the continued strong competition to rent land in No. 1 soil areas will maintain high market values.

More from the Country Guide website: Rent, or share?

“You get in that corridor in Olds, Strathmore, Lethbridge, where there are good cash flows and strong farm families, and it’s very competitive,” Dehod says. “Everyone’s saying we can’t get land, we can’t get land.”

Similar scenarios prevail in farm districts all across the country, with similarly strong resistance among landlords to drop their expectations.

Many of those landlords also know they have an even stronger position than they might have in previous cycles.

Commodity prices have dipped, but that doesn’t mean farmers lack the wherewithal to continue bidding up rental rates. Working capital remains strong from the 2012-13 crop year, and although 2013-14 crop prices have fallen, robust yields will aid in supporting good gross revenues.

“Though margins will tighten into 2014, strong balance sheets developed in the last five years will continue to support a strong rental market, as operations continue to grow and compete for land,” says Dehod. “The difference in land rentals to land payments is still substantial, so for young producers expanding, land rental — even at higher rates — is still attractive.”

Dehod adds that landlords won’t be keen on offering discounts anyway, especially since many of the contracts they were locked into when crop returns rose in 2010 to 2012 didn’t provide for profit sharing. In other words, they felt they didn’t get their slice of the extraordinary run-up in grain prices in those years, so it’s time they started getting some of their own now.

Yet in fringe areas with poorer soil and on pasture land, rental values could at least stabilize. With cattle numbers coming down, there just isn’t the same demand for pasture, says Dehod.

Land prices and land rental rates generally would weaken too if there is another large global crop in 2014, which would further decrease grain and oilseed margins into 2015, Dehod notes. But that remains to be seen.

In Ontario, the University of Guelph’s Brady Deaton saw farmers actually pay their landlords a bit more in rent than they had initially agreed to pay when commodity prices were high.

“From preliminary survey results… approximately 14 per cent of farmers surveyed in southern Ontario said they paid more than the required rental rate to the landlord for a given property in 2012,” says the ag economics professor.

In times of lower commodity prices, would landlords reciprocate? Deaton doubts it. Nevertheless, the majority of farmers surveyed didn’t expect to pay more: “We also asked farmers if they expected rental rates to increase in 2014, and approximately 31 per cent of farmers in southern Ontario expected it to increase, while 69 per cent didn’t.”

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