Leas­ing farm land al­ter­nate de­ci­sion

The Drumheller Mail - - REAL ESTATE - Diane Thomas The Drumheller Mail photo sub­mit­ted

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.

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