Comparing the farmland rental market to ownership
The 2020 FCC farmland rental rate analysis revealed that cash rental rates averaged 2.7% of farmland values in Canada. We also know that farmland affordability declined over time when measured against farm revenues.
In this post, we further our analysis on farmland affordability by analyzing rental rates relative to farm revenues. This relationship can be of assistance in the decision between renting versus buying farmland.
The Canadian average proportion of farm revenue required to cover land rent derived from a standard grain and oilseed rotation is 20% (Table 1). This is lower than the estimated 32% of revenues required to cover ownership costs.
Source: FCC calculations. Low and high rental rates represent 90% of the sampled rental rates as it excludes the top and bottom 5%. Prairie revenues are based on a canola-wheat rotation, and Quebec and Ontario revenues assume a soybean-corn rotation. Atlantic Canada and British Columbia are excluded because of the diversity in crops and rental rates, and the resulting variability in revenues.
The proportion of revenues to cover land rental rates varies significantly across provinces. Crops, quality of farmland and local market drivers such as availability and land use contribute to this ratio.
While renting is generally less expensive than the annual cost of farmland ownership, other issues matter when determining renting vs. buying. There is an opportunity cost of land ownership equals to the difference between renting and owning which, can be invested elsewhere.
Renting may be a great opportunity for young farmers to maximize the use of equipment and expand their land base and grow their operation. Cost savings from renting can strengthen working capital and facilitate investments in machinery, storage, etc. Buying land can tie up your available capital and reduce your cash flow, leaving fewer dollars for machinery, input needs or future expansion opportunities.
Farmland supply is relatively tight. Because the preference is typically to own over renting, the difference in ownership costs versus renting may also be known as the premium farms are willing to pay to own land.
Ownership has its own advantages. It provides flexibility when considering potential investments like tile drainage, storage and land clearing, making the land more productive and increasing profitability. A tenant can also be put in a difficult position if they lose the rented land base. Purchasing land has been historically a successful strategy to build equity in your business. But past returns are never a guarantee of future success as asset values can go up or down.
Business circumstances are unique to each farm operation. Ownership vs. renting is a decision that must meet the strategic objectives of the business. Adjusting the mix of rented and owned farmland provides options for a sound risk management plan.
Leigh Anderson is a Senior Economist at FCC with experience in agricultural markets and risk. He specializes in monitoring and analyzing FCC’s portfolio, industry health and providing industry risk analysis. In addition to his speaking engagements on agriculture and economics, Leigh is a regular contributor to the FCC Economics blog.
Leigh came to FCC in 2015, joining the Economics team. Prior to FCC, he worked in the policy branch of the Saskatchewan Ministry of Agriculture. He holds a master’s degree in agricultural economics from the University of Saskatchewan.