Many landlords set their land rent based on what other local landowners are charging, but that’s not always an equitable rate, says a provincial farm business management specialist.
“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,” said Dean Dyck.
Cash rent and crop share are the two most common arrangements in the province.
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. As well, 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,” said Dyck. “Then apply a discount of 25 per cent for variability in weather, yields, and prices since the tenant is assuming all of these risks.”
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 10 years against gross returns of the crops that were grown. In many areas, cash rent is about 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.
The general rule is to calculate, then negotiate, said Dyck.
“Tenants should know their cost of production and calculate the potential profit before establishing a fair price,” he said. “While money plays a role, other factors will come into the negotiations such as land quality, location, compatibility, communications, and honesty.”
Once a deal is struck, put it in writing, he added.
“This single act would eliminate the majority of disagreements that occur.”
Alberta Agriculture has a 50-page booklet on establishing, negotiating, and writing a land lease. The $12 booklet can be found on the Alberta Agriculture website (search ‘Leasing Cropland in Alberta’ ) or by calling 310-FARM (3276).