2020 FCC farmland rental rates analysis
The most recent FCC Farmland Values Report revealed that land prices increased 5.4% in 2020 on average. Multiple consecutive annual increases in farmland prices have pushed land values to an all-time record-high, even when accounting for strong farm income and low interest rates.
Elevated land values can make expansion difficult. Leasing farmland is an increasingly popular option. According to Statistics Canada, 43% of all farmland in Canada was leased in 2016 compared to 39% in 2011. Young farmers are more likely to rent land (50.6% of farmland was rented land for operators under 35 in 2016). Leasing can help an operation reach a targeted scale.
Relationship between cash rental rates and farmland values
Farmland rental rates are a relevant component of the broad farmland market. The Rent to Price (RP) ratio is a useful tool to assess trends in cash rental rates relative to the price of farmland:
The weighted average RP ratio of Canadian cultivated land comes out at 2.7% on average. There is considerable variation in the RP ratio across provinces (Figure 1).
Figure 1. 2020 Rent to Price ratio by province
Source: FCC calculations
Results in Prairie provinces are similar and around the national average. There is a sizable difference in Ontario and Quebec, with average RP ratios at 1.7% and 1.8%, respectively. Higher land values seem to be driving the difference. A similar observation can be made in British Columbia, where farmland prices are some of the highest in the country.
There is considerable variation in each province’s cash rental rates and land values (Table 1). In Prairie provinces, the range of the ratios is wider than in other provinces. The high-end RP ratio is usually for land that is the lowest value per acre in the province. And the lower end of the RP ratio is conversely associated with land of higher values per acre.
Table 1. Range of Rent to Price Ratio in each province for 2020
| || ||Range*|
|NL||N/A|| || |
|Canada||2.70%|| || |
Source: FCC calculations. * Note that a range represents 90% of the calculated RP ratios in each province as it excludes the top and bottom 5%.
The highest average RP ratio is in PEI at 5.5%. Revenues from specialty crops, like potatoes, are generally higher than revenues for grain and oilseed on a per acre basis. This creates upward pressure on rental rates. In Western New Brunswick, where there are many potato growers, the Rent to Price ratio was at the high end of the provincial range.
What influences the Rent to Price Ratio?
Both the cash rental rates, and land values drive the value of the ratio. Here are a few important factors to consider when determining rental rates:
- Availability of cultivated land to rent vs concentration of operations in an area: As with any commodity, scarcity matters. Low supply leads to higher rental rates. A high concentration of similar operation types (cash crops, potato, ginseng or other specialty crops) can increase farmland demand and drive-up rental rates.
- Interest rates: The interest rate environment influences the landowner’s expectation for returns on investment from leasing land.
- Farm revenues: A positive operating environment (high crop prices) usually push up rental rates.
- Duration of the agreement: Rental agreements negotiated a few years ago may not reflect current market conditions (such as increased land prices recorded in recent years).
- Type of agreement: A crop share agreement will not reflect the same market dynamics as a cash rental rate.
- Quality of land: The type of soil, topography, tile drainage and the yield that can be obtained from the land are correlated with revenues and thus rental rates.
- Environmental considerations: Livestock operations may need land for manure application, lifting demand for land in some areas.
There is a correlation between land prices, rental rates, and farm revenues. They tend to move together over time. At any point in time, one of these factors may be off-balance with the others. Next week, we’ll talk about the relation between farm revenues and rental rates.
Lyne Michaud, É.A., Business Intelligence Analyst, Valuations