Farmland rental deals require transparency
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Provincial farm management specialist Darren Bond was hearing from an unusual number of callers looking for the scoop on farmland rental rates one morning this spring.
One of the most frequent questions he gets asked is how much to pay or charge for rented farmland.
About 40 per cent of the land farmed in Canada is rented. Escalating farmland values have prompted many farmers to choose renting over purchases. Landlords may be disconnected from the local scene and want to be sure they’re charging fair market rates.
But the cluster of calls from one area of the province and the rumoured jump in rental values had him a little confused.
The mystery was solved when he heard from an area producer looking for assistance with Manitoba Agriculture’s farm-building-rental calculator program.
The farmer was working on a deal with a retiring neighbour to rent some of his farmland — but the deal came with access to a yard site with bin storage and a pole shed. That detail changed the value of the negotiation considerably but was missing from the narrative making the rounds.
Rural coffee shop row may be efficient for getting information around. Still, it’s not always carrying the full story, Bond reminded those listening in on the weekly CropTalk webinar this week.
However, the real point of his story was that while there are ways to calculate how much rent the farmer should be paying based on the land’s profit potential or the land’s value, there is no way to know what deals landlords and renters are actually making.
“It’s not like land sales where you can search land titles and see what some transactions were. It’s a dark market… both producers and landlords are very reluctant to reveal these rates,” he said.
The best landlords and tenants can do is to calculate what a prospective agreement is worth to them based on their financial situation and needs.
Bond says there are two ways to go about that. One is based on production costs: gross revenue potential (average yields multiplied by average prices), less operating costs, including labour, field equipment and storage and the producer’s profit expectation.
The other approach uses land purchase prices, investment rates of return and property taxes to generate a range of rental values.
“The nice thing about doing it this way is that it’s a clear and easy way to determine land rent based on the land values. Roughly, for every thousand dollars (per acre) of land value, there’s about 25 bucks an acre of land rent,” he said.
Each farm is unique, and there are multiple categories of landlords, ranging from retiring farmers, to people who have inherited farmland, to investors who see it as a safe haven from volatile markets.
The province offers an online tool that allows farmers to plug in their numbers, and it spits out the maximum amount of rent the farmer can pay and remain profitable.
However, there are many factors beyond the basic calculations that could influence the value of a rental agreement, such as where the land is located or whether the renter is committed to good land stewardship.
Plus, these calculators are also only as good as the information they are given to process, so farmers need to contain their inherent optimism. For example, failing to consider added depreciation of farm equipment in their cost calculations trips up a lot of would-be renters, Bond said.
A farmer may be able to take on more land without buying more equipment, but that doesn’t mean there is no impact on equipment costs. Using the same equipment for more hours hastens depreciation.
Bond urges farmers and landlords to be open and transparent with each other and to put their agreements in writing, clearly spelling out the terms and expectations of both parties.
However, the first step towards being candid with a prospective landlord is being frank with themselves about whether farming more land adds enough additional value or simply saddles the operation with additional costs in an increasingly volatile operating environment.
Laura Rance is vice-president of content for Glacier FarmMedia. She can be reached at firstname.lastname@example.org
Laura Rance is editorial director at Farm Business Communications.