Recent crop price declines have many producers looking more closely at their financials; be it in fungicide applications or additional inputs. The profitability in the sector is clearly not what it has been over the last five years: there are very few inputs that producers have the ability to negotiate. As a result, there is increased attention towards cash rental rates.
The University of Illinois recently to understand how much cash rental rates could decline for the next growing season. We followed their template below and conducted the same analysis for crops in Ontario. We will follow up later with a post for Saskatchewan.
Using Ontario Ministry of Agriculture and Rural Affairs , we estimate the profitability of a corn–soy–wheat rotation given various assumptions about yield and prices. We adjust costs upward for higher productivity areas, though it’s important to realise that your own farm’s ability to pay for land will depend on your cost of production and yield expectations. Here, we take revenue estimated by the crop prices and yields below and subtract 2014’s cost of production. The result is how much a producer can pay for land. These estimates do not pay a producer for the risk they take which should be taken into account.
Unsurprisingly, changes in both expected yields and prices can have a large impact a producer’s ability to pay for land. On lower productivity land with low price expectations producers face a break-even rental rate of only $97 an acre. This could increase to $229/acre on higher productivity land and more optimistic prices.
For some producers these calculations should suggest a downward revision of 2015 rental rates. Talking to your landlord and explaining to them why you need to adjust rental rates downward can be difficult. These ranges show that the profitability of a rental arrangement can be a bust or a windfall, so you need to analyse the probability of the outcomes for your operation and negotiate an agreement that is fair to yourself and to the landlord. This is the only way you can achieve a long lasting relationship that works for both parties.
If you are interested in learning more about land rental check out Lance Stockbrugger’s upcomingevents: What you Should Know Before you Buy or Rent Farmland.
James Bryan – Senior Agricultural Economist