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Land rents are moving targets

Striking a fair deal for renting land is a little different than it was 40 years ago in Granddad’s day or even 20 years ago, in Dad’s day.


May 4, 2009
By John Dietz

Striking a fair deal for renting land is a little different than it was 40 years ago in Granddad’s day or even 20 years ago, in Dad’s day. “I’ve had a lot of calls, especially in the past month, and probably more from landlords than tenants,” says Bob Gwyer, farm management specialist with Manitoba Food, Agriculture and Rural Initiatives, Minnedosa. “They’re  wondering what rent has been doing, what it should be doing, asking how does my rent I’m getting right now stack up against other rents you’re hearing and, of course, is there a different way of doing this thing.”

WTCM32_2graincart1
Landlords and renters are coming up with innovative rental agreements that fairly reflect input and commodity prices.
Photo by Bruce Barker.

Similar questions are being asked across Western Canada. Forty years ago, values were pretty stable for land and for crops, and the people were stable.

The choice was simple, crop share or cash rent. A few words and a handshake settled the deal. The owner might get a third or a quarter of the crop. Cash rent varied, but was around five to seven percent of the actual land value. For example, $20 to $25 was a fair rent for land worth $400 per acre.

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Market values for good land around Minnedosa today probably are $200 per acre more than 10 years ago, he suggests.
Today’s owner, Gwyer says, may be working in a city and not available for a handshake. She, or he, may have no place to store a quarter of a crop, or any interest in handling it. They know the value is changing. They probably know crop values skyrocketed in 2007.

Ten years ago, this good land might have generated $200 an acre for wheat and $250 for canola. Last year’s cash returns could have been $375 for wheat and $600 for canola. “In a year with input costs going up and grain prices changing rapidly, they are wanting to look at something that might distribute the income proportionally in a more fair or equitable manner, to try to find a formula to share the risk between landlord and tenant,” Gwyer says.

Cash rent remains the most common. It’s the simplest. Many rents in 2008, he suggests, probably increased $5 to $10 an acre because of increases in both land values and crop returns. “Typically, there can be a wide range in cash rent. For example, some of our Newdale soils probably are still rented for as low as $20 to $25 an acre, and the high end would likely be $45 to $50. Most people, I think, would be paying at least $30 to $35 an acre.”

Fair and flexible rent
If a grower is uncomfortable with a “gut feeling” for fair land rent, Gwyer suggests this formula:  Use a long-term investment rate and multiply the land value by that rate. For example, if a grower can get four percent on a 10 to 20 year investment and if the land could be sold today for $600 an acre, the minimum rent value might be $24 per acre. Maybe though, for convenience or other reasons, the tenant might go to five percent or $30 an acre. With land values changing year to year, reaching that agreement can be an issue.

The other local old standard, a one-third crop share, also has been causing some uncomfortable feelings in the past couple years. It’s seen as a “little rough on tenants.”

Gwyer has seen two variations that give some flexibility. The first is sharing crop inputs and balancing it off with a 20 or 25 percent crop share. For example, the owner might pay half the fuel bill and accept a 25 percent crop share.

The other approach, to keep it simple, would split out the cost-share on a smaller basis such as 20 percent. “There’s a couple issues involved if you want a flexible arrangement, but it works OK in some instances,” Gwyer says. The issues include picking a fair number for expected or actual bushels per acre; agreeing in advance on all the details such as pricing point mechanisms and crop mix; and actually “opening up” about input costs and operating costs for machinery.

Another way to gain flexibility may be in the length of the lease. To offset high risks with farming today, some agree to lease a piece of land for three years but only set a rental amount on an annual basis.

Here, the thinking is that the rental value needs to reflect the current production value/potential as well as local land prices. Next year, the relationship between current market value and crop input costs may not be the same.

He adds, “There are landlords and tenants who’ve had arrangements for many years with no leases other than a handshake. I bump into that fairly regularly as well.”

Provincial departments of agriculture have publications on land rent agreements. Some have sample leases to help people make their arrangements.

The Iowa rental experience
Iowa State University, at Ames, Iowa, recently did a survey of flexible cash rental agreements. The survey identified five categories and nearly 100 examples. Many of the options are online: www.extension.iastate.edu/agdm/wholefarm/html/c2-22.html

“Our last survey shows about 22 percent of the rented acres were under a crop share lease and 78 percent of the acres were under a cash rent. About 12 percent of the cash rents were flexible cash rent agreements of some type,” says William Edwards, Iowa State extension economist.

Flexible leases let both sides share some of the risk and generally keep rent in proportion to the income generated. “Have it in writing and maybe do a couple of examples so that, when the time comes to calculate, everybody’s in agreement on how the rent will be calculated,” he adds. “The nature of the flexible lease is that, once you agree on the formula, you don’t have to make changes from year to year and you don’t have to renegotiate the amount of rent paid each year. That takes care of itself.”

Iowa Examples
Flexible rent based on gross revenue.
The rate is a percent of the price times the yield.
 

  • Actual yield   x   March 1st cash price  x  40 percent.
  • One-third of total bushels times average price received from last year’s crop.
  • Yield x price established at local elevator x 35 percent; $125 minimum.
  • Minimum base rent plus a bonus based on a percent of the gross revenue over a certain level.
  • Cash base + 25 percent over $700 per acre gross.
  • Base rent such as $150, plus one-third of gross sales over $400 for corn or over $300 for soybeans on a per acre basis.
  • Flexible rent based on yield only. The tenant carries the risk.
  • Corn: actual yield x $1.40/bushel. Example: 200 bushels x $1.40 = $280/acre.
  • Base cash rent plus bonus when yield exceeds a predetermined level. $180/acre base + $50/acre if yield exceeds 200 bu/ac. for corn.
  • Rent based on price only, requires crop insurance for security.
  • Average price of 25 sale dates at local elevator x 175 bu/ac x 38 percent.
  • 33 bushels of corn or 10 bushels of beans per planted acre + $110 cash on March 1st.

Profit-sharing agreements. Profit is estimated each year after paying all production costs, and then divided between owner and tenant.

Actual bushels x fall average price, minus inputs, divided by 2 = final rent.

While these Iowa examples use different crops, tenants and landlords in Western Canada can use them as templates to develop their own rental/share agreements.  In the end, though, the negotiation of rent comes down to what is fair to both parties, and developing a solid working relationship so that renter and landlord feel properly compensated for their risk.


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