Will prairie cash rental rates drop in 2015?

During the past five years Canada’s crop sector has been especially profitable. More recently, crop price declines are creating downward pressure on producers’ financials.  There are very few inputs producers have the ability to negotiate and as a result, there is increased attention towards the potential for cash rental rates to decline.

The University of Illinois recently published a study to understand the extent to which cash rental rates could decline for the next growing season. We followed their template for Saskatchewan here, and in an earlier post for Ontario.

Using Saskatchewan Agriculture’s 2014 Crop Planning Guide we estimate the profitability of a canola-wheat-barley rotation given a variety of yield and price scenarios. 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 be different depending on your cost of production, yield expectations and rotation. Hopefully you already have your farm’s cost of production and yield history to do a similar exercise.

The table below estimates the maximum per acre rental rates producers can pay for the 2015 growing season, without taking into account the cost of their labour. Paying for your time and the risk you take is important. We subtract the cost of production from revenue in a variety of price and yield scenarios to obtain the maximum rental rate.

On lower productivity land coupled with lower price expectations, producers face a break-even rental rate of $18 an acre. On higher productivity land, and with more optimistic price expectations, this could increase to nearly $91/acre. This range isn’t surprising given the large range in land quality in Saskatchewan. The largest challenge with setting rates is we don’t know what yields or prices will be at harvest.

These ranges show that the profitability of a rental arrangement can be a bust or a windfall. Looking at the most probable outcome can help you determine a fair rental rate for yourself and your landlord. For some producers these calculations could suggest a downward revision of 2015 rental rates. Your landlord may have a different view of rental rates – to secure a comparable return to alternative investments which may suggest higher rental rates. When considering what rate you can pay, it’s a delicate balance between short term profits and securing rental lands for the long term.

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