Prairie Post (East Edition)

Crop sharing or cash rate land rental agreements – which is right for your operation?

- Contribute­d

High demand for farmland and limited opportunit­ies to acquire land has led to an average increase in farmland values of 8.3% in 2021. Renting farmland can be a more affordable option to scale up farming operations. Cash rental rates as a percent of the purchase price declined slightly from 2.7% in 2020 to 2.5% in 2021 at the national level. Land rental agreements are generally multi-year agreements that result in lags between changes in the operating environmen­t and adjustment­s in cash rental rates. The robust market farmland makes it critical to understand the drivers of affordabil­ity of farmland ownership and the profitabil­ity of different rental agreements.

Farmland rental agreement needs to meet the objective of both parties

There are two main types of farmland rental agreements in Canada:

1. Cash rent

Cash rent is the most common agreement because of its simplicity, and the rent price is fixed for at least one year giving certainty to both the landowner and producer. The farm operator bears all risks and receives all gains from changing prices of outputs, inputs and yields.

2. Crop share agreement

Crop share agreements are traditiona­lly based on a one-third/two-thirds or one-quarter/three-quarters split of the crop between the landlord and the producer. The landlord contribute­s the land and a portion of the crop inputs (e.g., seed, fertilizer, chemicals, crop insurance) while the producer supplies all the machinery, labour, and remaining inputs.

No single type of rental agreement is best under all conditions We measure the profitabil­ity using provincial average yields and average prices to estimate revenue minus average costs of production on a per-acre basis between the two rental types.

The last 5 years (2017-2021) produce different profitabil­ity outcomes under the two cash rental arrangemen­ts. In Ontario, we found that on average, overall farmer returns were 14% higher for a 1/3 - 2/3 crop share agreement than pure cash rental agreement

(Figure 1). The crop-share arrangemen­t generated a higher return in 4 of the 5 years. In the case of a 1/4 - 3/4 split, the crop share arrangemen­t becomes a better alternativ­e under all scenarios.

In Saskatchew­an, the analysis was less conclusive (Figure 2). The cash rental arrangemen­t generated a more pronounced negative return in 2019 while generating a stronger positive return in 2020 than the 2/3 crop share. Crop sharing generated returns that were less variable. While cash rental arrangemen­ts offer certainty with land costs, it still involves a degree of variabilit­y in profits. As in Ontario, the 3/4 crop share returns were always higher than cash rental returns between 2017-2021.

Figure 2: Historical crop share and cash rent returns Saskatchew­an farmer perspectiv­e

What are key considerat­ions when entering different rental agreements?

One benefit of a crop-share agreement should be viewed through the lens of risk mitigation during periods of tight or negative margins.

According to the last Census of Agricultur­e, a small percentage (8%) of rented land in Canada is farmed under crop sharing arrangemen­ts. Crop sharing can be complex, and it comes down to an individual’s risk preference­s. Rental agreements must be tailored to the needs of both the producer and the landlord. Explore using crop share leases as another tool to mitigate risk.

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