Determining A Fair Land Rental Rate

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Alberta Agriculture conducts a survey every year on crop rental rates. The preliminary 2008 survey came out in December. The report covers many of the municipalities in the province, however not all counties or municipal districts responded. The 2008 survey indicated an increase of approximately 10 per cent in the 2008 rental rates over the 2007 rates, certainly not the 20 to 30 per cent increases anticipated last spring.

“Market fundamentals for 2009 seem to indicate a rather uneventful year as far as grain and oilseed prices are concerned,” says Ted Nibourg, farm business management specialist with Alberta Agriculture. “Grain prices have been tied directly to biofuel initiatives for the last few years resulting in very strong prices. With the current global economic reset, this price relationship has all but disappeared. These factors point towards very little movement in cropland rental rates for the 2009 growing season.”

To arrive at a rental rate tied to the productivity of the land, take one-quarter of the average or long-term yield of a given crop and multiply this by an anticipated price. This result should be further discounted by 25 per cent to cover risk, uncertainty and timeliness of payment. An example would be an 80-bushel barley crop – 20 bushels represents one-quarter of the yield. Using a $3-per-bushel price, one arrives at gross value of $60. Discounting the $60 by 25 per cent results in a rental rate of $45 per acre for cash rent.

“What was noticed last spring was a shift away from cash rent towards one-quarter/three-quarters crop share arrangements where the landlord receives one-quarter of the crop but does not contribute any production costs,” says Nibourg.

“Occasionally, this crop share arrangement moves towards a one-fifth/four-fifths share to reflect the higher cost of production for some crops. These shifts are based on a risk-sharing arrangement between landlords and tenants. Landlords can take advantage of increasing commodity prices and tenants are sheltered somewhat from downside price risk.

“In a crop share arrangement, the tenant and landlord share risk in direct proportion to the crop share. Likewise, they share any rewards in price and production. One-third/two-thirds crop share arrangements, which constitute about 85 per cent of the crop share arrangements in the province, did not seem to have been affected by the volatility in crop prices. Indeed, these arrangements have always shared risk so nothing has changed. Over the long term, it is not uncommon for landlords to find crop share arrangements the most profitable.”

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