Land rent realities for 2014

Rental rates started an upward trend in early 2008, and peaked in 2013

The year 2014 could prove to be a tumultuous one for cropland rental rates. The fact that rental rates will likely soften should not be a surprise. Cropland rents are a function of productivity and price for the most part. Other factors that play a minor role include proximity to the tenant’s existing operation, field efficiency and local competition for available rented land. These other factors are usually fairly static from year to year, so the deciding factors going into the next crop year will be the two Ps, price and productivity.

“Alberta Agriculture and Rural Development’s Ag-Info Centre has been fielding calls on anticipated crop rental rates for the coming year since after harvest,” says Ted Nibourg, farm business management specialist with Alberta Agriculture and Rural Development. “This is the typical yearly pattern; however, the difference this year is the downward pressure on rates.

Rental rates started an upward trend in early 2008, and peaked in 2013. Stronger grain and oilseed prices prompted landlords to renegotiate land leasing arrangements, especially those involving cash rents. It is understandable that with increased returns, higher cash rents were justifiable.

A common trend during the period 2008 to 2013 was the inclusion of a clause in rental agreements stipulating that rents would be up for negotiation after harvest every year even with three- to five-year tenures.

“This was definitely an advantage to landlords giving the benefit of increasing grain and oilseed prices. The increase in rents occurred at a slower pace than the increase in crop prices, however,” says Nibourg.

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Following prices?

Current crop prices are at about the same level they were in 2007, just before the run-up on prices. This would imply that rents could regress to the 2007 levels but, just as the rise in rents was slow to materialize, so too could be the lowering in rents. Direct expenses for most crops have increased anywhere from 24 to 53 per cent since 2007, averaging approximately 36 per cent. At current crop prices, yields would have to be well above average for a producer to realize a positive contribution margin. The contribution margin is what pays the rent.

There is a school of thought that advocates cash rent should be one-half of the contribution margin. This year however, above-average yields would exacerbate the already oversupply situation we are experiencing thus further delaying any price correction.

“Running a cash rent scenario using crop prices at this time last year, the result was an economic cash rent of $90/acre using hard red spring wheat, canola and barley in a four-year rotation with one year of canola, one year of barley and two years of wheat,” says Nibourg. “Running that same scenario using current prices, the result was an over 40 per cent drop in rent to $53/ac. The yields in this scenario were a respectable 61 bushels per acre for wheat, 77 bushels for barley and 38 bushels for canola.”

Cash flow will likely play a part in the 2014 cropland rental situation. Grain movement has been slow making it difficult for producers to market grain. Only about 30 per cent of eligible producers are enrolled in AgriStability, and payouts will probably not be realized until 2015 at the earliest. AgriStability does however, provide a backstop that could mitigate some of the downward pressure on cash rents. Cash advances may cover direct expenses for some smaller producers but for larger producers the advances will only meet half of their needs due to the $400,000 cap on advances. Cash flow difficulties may put downward pressure on rents going forward.

“At the end of the day, landlords will be considering themselves fortunate if they can maintain rents to 2013 levels,” says Nibourg. “Tenants may be willing to ride out the storm in order to maintain their land base but economically that cannot last indefinitely. One thing is certain, 2014 will be a transition year as far as land rents are concerned. But then again, that is the nature of agriculture.”

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