Determining a reasonable crop land rental rate
Apr. 4, 2016 - With spring approaching, many landlords and tenants are reviewing their crop land rental arrangements to see whether they are fair and reasonable.
Dean Dyck, farm business management specialist with Alberta Agriculture and Forestry (AF) says determining an equitable rate is not easy. "Often, people use what others are charging or paying in the local area. Following this approach has pitfalls because the rate may not be reflective of the soil productivity on the farm, or there may be a difference between what was rumoured and what was actually paid."
Ultimately, land rental agreements are pivotal to a producer's success, particularly as changes in prices and yields from year-to-year affect profit and the renter's ability to pay.
In Alberta, cash rent and crop share are the two predominant crop land rental arrangements. Cash rental is common because the lease is simple, the rent is fixed, and the landowner does not have to make any operating or marketing decisions. The tenant has more control over cropping decisions, and can benefit from higher profits.
A useful method to estimate a cash rent is called a "crop share equivalent," or the rental rate that would be received from a typical 75:25 crop share lease. Computing the rate using this method requires estimates of long-term average yields in the area, and realistic prices for the coming year.
"A suggestion is to use crop insurance yields and insurable prices. Then apply a discount of 25 per cent for variability in weather, yields, and prices since the tenant is assuming all of these risks" says Dyck. The formula is: (yield x 25 per cent) x price x 75 per cent. Complete this calculation for at least four major crops grown in the area and take the average.
Another simple method is a percentage of gross returns. Compare cash rents in your area over the past five- to ten-years against gross returns of the crops that were grown. In many areas, cash rent is approximately 20 to 24 per cent of gross returns.
Crop share rentals are becoming less common because many landowners do not want to take the risk of price or yield. These leases are typically 75 per cent tenant: 25 per cent landlord. If fertilizer and chemicals are shared, then the lease shifts to 66 per cent tenant: 33 per cent landlord.
A general rule of thumb is "calculate, then negotiate." Tenants should know their cost of production and calculate the potential profit before establishing a fair price. While money plays a role, other factors will come into the negotiations such as land quality, location, compatibility, communications, and honesty.
"Once a price and terms have been agreed, the most important thing you can do is put the agreement in writing," says Dyck. "This single act would eliminate the majority of disagreements that occur."
More information on establishing, negotiating, and writing a land lease, is available for purchase via AF's comprehensive guide, Leasing Cropland in Alberta, or by calling the Ag-Info Centre at 310-FARM (3276).
April 4, 2016 By Alberta Agriculture and Forestry