A question I often hear when I present FCC’s economic outlook is whether land cash rents will decline along with commodity prices. It’s a reasonable question. Although the lower Canadian dollar has protected Canadian producers’ revenue, corn, soybean and wheat prices in the U.S. market have all declined.
To rent or not to rent?
It’s true that cash rental rates are notoriously sticky downward, but they also respond to evolving market conditions over time.
So here lies the dilemma. You expect commodity prices to decline in the near future and/or see your input costs climb; you project a tract of land will yield a negative net return in the short-term. Should you continue to rent that land or not? You may shut the door on the opportunity to farm it again in the future, when prices improve, if you fail to renew now.
As a renter, you should take these steps to accurately determine your ability to rent.
- Know your costs of production and your projected revenue.
- Discuss the situation with your landlord. You may be able to agree on a reduced rental rate – but remember: as in any negotiation, it helps to put yourself in the shoes of the other party. Landowners are often reluctant to lower cash rents until market conditions show more significant downturns.
- Factor the recovery of applicable fixed equipment costs into the decision.
Research says ‘know your premiums’
- Know your premiums
- The premium is defined as the difference between the actual cash rental rate and the rental rate you need to break-even
- Find out how your premium payment will affect your farm’s liquidity
- Successive years of negative returns can drain your working capital and challenge your farming operation. Experts suggest setting a target for working capital to equal 30% of your planned expenses.
Balancing the need to secure land for the long-term and managing the financial health of your operation is a difficult exercise. Nobody can accurately predict the future. I suggest you run scenarios and position your business to leverage future opportunities and face emerging challenges.
J.P. Gervais, Chief Agricultural Economist