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, according to J.P. Gervais, Farm Credit Canada’s (FCC) chief agricultural economist.
“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,” Gervais said. “There is no single answer, only a number of considerations.”
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,” said Gervais, adding that producers should also factor in fixed costs, such as equipment, when considering a lease.
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,” Gervais said. “Landowners may be reluctant to reduce cash rents, and choose to wait for more significant downturns in market conditions before doing so.”
Some other considerations for leasing farmland include:
- How much of a premium are you required to pay to retain control of the land until the outlook of better net returns? The premium is defined as the difference between the actual cash rental rate and the rental rate that you need to break-even.
- How does paying a premium affect your farm’s liquidity? Successive years of negative returns can drain your working capital and challenge your overall farming operation. Set a target for working capital equal to 30 per cent of your planned expenses.
“Balancing the need to secure land for the long-term and managing the financial health of your operation is a difficult exercise,” Gervais said. “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.”
