| | What is cash rent worth in my area?
It is often difficult to determine cash rent in an area through word of mouth. Prices and values are quoted but unless one understands the true nature of the rental arrangements, difficulties and misunderstandings can occur. A landlord may hear of cash rents in their locale that far exceed the area average and assume that their land rent should be comparable. Likewise, a tenant may have neighbors paying less rent and want to know why he or she is being disadvantaged. Differences in cash rent boil down to one common factor - land productivity.
What is the difference between cash rent and crop share?
With cash rent a landlord receives a guaranteed payment. The landlord’s risk is minimized and all production and marketing risk falls on the shoulders of the tenant. Often there will be a discount in the cash rent price to compensate for risk allocation.
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. Over the long term, it is not uncommon for a landlord to find this arrangement the most profitable.
A flexible cash rent is based on either commodity prices, production or both. For example, the cash rent paid may equal 20 bushels of barley priced at a pre-determined date. This reduces price risk for the tenant and the landlord can take advantage of a bullish market. Another type of flexible cash rent involves establishing a base rate and then a performance bonus. For example, a rental rate is established in the spring and if production and/or price improve above a set level, then a bonus is paid.
How do I determine cash rent for a piece of ground?
As mentioned earlier, cash rent differences are a result of productivity differences. One quarter may be suitable for growing canola while the adjoining quarter may be hard pressed to grow a decent crop of barley. Determining the contribution margin for a given crop on a particular piece of ground is one useful method of determining cash rent. Long term average yields are multiplied by an anticipated commodity price to come up with gross revenue per acre. From this is subtracted direct expenses for that crop. Direct expenses should be fairly consistent between fields so the resulting contribution margin represents the productivity differences between fields. By splitting the contribution margin in half, one can get a good idea of cash rent per acre. This exercise is also useful in determining crop share arrangements as less productive land will command a lower crop share. An added benefit to this contribution margin approach is that landlords get a better appreciation for the economics of agriculture, especially landlords who do not have an agricultural background.
What else should I do when renting crop land?
The most important aspect of any rental arrangement is getting a written agreement. This should outline items such as rental price, tenure, opt out provisions and allocation of government support payments to name a few. A written agreement goes a long way in resolving any disputes and will keep neighbors friendly.
Where can I get more information?
Alberta Agriculture, Food and Rural Development publishes a comprehensive manual that outlines different aspects of establishing, negotiating and pricing land rental. It also covers taxation and legal issues dealing with renting cropland in Alberta. Sample agreements are included in this manual. This manual is called “Leasing Cropland in Alberta” and is available through Alberta Agriculture, Food and Rural Development’s Publications office.
Leasing Cropland in Alberta
Prepared by Ted Nibourg, Ag-Info Centre, Alberta Agriculture & Food |
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