Lower crop prices will certainly make cash rental rates a hot topic this fall. Last month we wrote about the potential for downward adjustments in cash rental rates in both and . As a renter, knowing your cost of production and expected revenue is critical in determining your ability to pay for land rental. Landlords, however, may consider different factors.
There are many reasons that landlords may own and rent out land. The primary driver is that farmland generates income and is generally seen as a safe investment compared to many other financial assets. Land can be held by retired farmers, family members and city-dwellers for a variety of sentimental or investment purposes, but generating revenue matters to most.
One type of analysis landlords may do is compare their returns to renting out farmland to other safe investments. As an example, consider the Government of Canada 10 year bond rate over the last year. It ranged from 2.2 to 2.7 percent over the last 12 months, with an average of 2.4 per cent.
These values would suggest a landlord would ask for $22 to $27 / acre for land for every $1000 it is worth. Additionally, landlords will keep an eye on market conditions, looking at past yields and prices to project gross income. Cash rental rates are notoriously slow to adjust, but landlords are likely to respond to evolving market conditions over time.
Knowing your cost of production and how much you can afford for land helps ensure your business remains profitable. Rental rate discussions can be challenging. Putting yourself in the landlord’s shoes can help facilitate your negotiation.
If you are interested in learning more about land rental check out: Lance Stockbrugger’s upcoming Ag Knowledge Exchange events: What you Should Know Before you Buy or Rent Farmland.
James Bryan – Senior Agricultural Economist