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Land Rent – Are the Rates Reasonable?

24/06/2016


This article was originally published in the Western Producer and has been reproduced with permission.

Over the past five years, the grain production industry in many areas of the prairies has seen some very lucrative harvests. This has improved cash flow, balance sheet strength and overall optimism in the industry. It has also pushed land rents higher, into ranges we have not seen before.

This seems to have upset a lot of producers and in some cases rightfully so. Many players in the industry tend to have short term memories and forget about the not so good years. However, the producers who are paying higher rents are not all going broke and many of them are enjoying great success.  

Here are a few ways to look at land rent in my opinion, as to why certain producers are paying more and more, to the point where others are left scratching their heads:

  1. Interest rates - If land is trading at $2,000 / acre and you can access a lending rate of 4%, assuming you have to borrow money to purchase the land, your cost to finance the land is about $80 per acre. So if you are willing to pay that purchase price and the related interest on the debt, you as a farmer should be willing to pay as much as $80 / acre cash rent and be no worse off than if you bought the land – financially anyway. There are other benefits to buying such as you control access and do not have to fear the contract renewal dates.
  2. First right to purchase - Does renting the land give you the first right to purchase it in the future, and therefore, attract a higher rent as a result? This was often assumed in the past, it was just the right thing to do for a landlord to offer the renter a chance to buy it. However, I recommend you discuss this with the landlord up front and put something on paper if you can. The world has changed and it should not be assumed that the offer to purchase will be there. 
  3. Efficiency and convenience - Perhaps you currently farm three quarters of a section and this last piece of land completes the section, which increases productivity and efficiency by being able to farm the entire section as one big field or being able to better access part of the other land that sits behind a water hole.

A word of caution - Let’s say you currently rent 75% of the land you farm at $60 / acre. If you are bidding a new piece of land at $75 / acre you need to consider what that does to the overall operation.  Let’s face it, all of us who grew up in small towns on the prairies know full well that your offer to pay $75 / acre will eventually end up in the coffee shop, and all over town. So you just gave your existing landlords an opportunity to ask for more the next time the renewal comes up. If you rent a large portion of your land, this can increase your cost of production significantly.

Overall, what should be of most concern to you as a producer, is how does renting more land at whatever rate you plan to offer or are required to pay, impact your bottom line? If you invest some time and money to meet with your agriculture business advisor and run the numbers, this should add some clarity to the decision. You might find that paying $75 / acre is devastating to your operation, and should not be done. You also might find that paying $100 / acre actually increases your bottom line, and therefore, is a good business decision. And, if you properly manage your involvement in the various farm income programs that are offered, you might also find the risks of paying higher rents are lower than you thought.

Contact Stuart Person, CPA, CA, Agriculture Business Advisor at 306.765.8581 or [email protected]