Leasing farm land alternate decision
Farm Credit Canada (FCC) news release stated that lower commodity prices in recent years may have slowed the pace of farmland value increases, but the cost of renting land has been slower to react.
FCC Chief Agricultural Economist J.P. Gervais said, “This makes the question of whether to buy or rent land even more complicated and it’s one of the most common questions I’m asked when presenting for industry and FCC events across Canada. There is no single answer, only a number of considerations.”
Gervais further explained, “As commodity prices decline and input costs increase, the temptation is to discontinue renting land. However, not renewing a lease may mean shutting the door on the opportunity to farm that land again in the future. As a renter, there are a few basic steps to follow when considering your options. Knowing your cost of production and making projections about revenue are critical in determining your ability to pay for rented land, adding that producers should also factor in fixed costs, such as equipment, when considering a lease.”
Gervais continued, “Next, producers need to discuss the situation with their landlord to see if they can agree on a price adjustment that reflects the economic conditions. As in any negotiation, consider putting yourself in the shoes of the opposite party to help in reaching an agreement. Landowners may be reluctant to reduce cash rents, and choose to wait for more significant downturns in market conditions before doing so. Balancing the need to secure land for the long-term and managing the financial health of your operation is a difficult exercise. Nobody can predict the future with accuracy. The only available option is to run scenarios and position your business to be able to take advantage of future opportunities and face emerging challenges.”
Local Drumheller farmer Tony Pliva explained “When it comes to the term of the rental agreement, going longer is better, you can lock in a good interest rate for a longer period of time, you are able to plan your budget and protect yourself from inflation. The most common form of renting is cash as there is lower up front costs. There could be compensations, written into the agreement, back to the landlord for a good crop or if the price of land increases.”
Pliva further explained, “Negotiations with the landlord are done over coffee and essentially you either agree or disagree. Once everything is in agreement, your lawyer will draw up a contract. One advantage is that, there is no property tax, however the oil revenue is not yours either. Another advantage is that the rental payment, depending on your accountant and if you are incorporated, could be a tax deduction.”
Drumheller FCC Relationship Manager David Spaulding explained: “When it comes to leasing, some of the advantages are, that it is more affordable than purchasing, rented acres are typically more available than land for sale, having the existing rental contract can al- low the lessee first opportunity to purchase the land from lessor when it’s time to sell as well as land rental rates can adjust over time to reflect economic conditions. Cash rent is the most popular type of leasing. It is straight forward and there is no shared risk or requirement for extra record keeping between the land owner (lessor) and the farmer (lessee). More often than not, lessor and lessees have a prior relationship helping secure acres in the long term, whether it is family, neighbors or multi generational friends.”
Spaulding explained“Crop sharing agreements are also available where the lessee and lessor share the profits of the yield. They take a shared risk on cost and benefits of the crop. Common risk mitigation strategies include fixed cash rent with yield benchmarking which occurs in years of above average production a bonus is paid based on higher than anticipated yield. In average or below average years the fixed rate is only paid. This would be transaction specific and unique to the rental agreement. Rental rates are based off bench marking, agreeing to a flat rate X amount of dollars per acre, and predetermined yield amounts. Diligence is required on the paperwork.”
On March 8 the Drumheller FCC will be hold a Learning Event in the McDougald Room at the Badlands Community Facility from 1:00 PM till 4:00 PM. The discussion will be about leasing and renting farmland. Keynote speaker Lance Stockbrugger, chartered accountant and farmer, will provide a real synopsis of real agreements. There is seating for 100 and the public is invited to attend. Sign up is required, please visit their website www.fcc-fac.ca or call the office in Drumheller 403-8234111.
Local farmers at harvest time, have been leasing land as an alternate choice and an affordable option.