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What’s influencing land rental rates?

An Ontario survey found that close relationships and long rental terms made no difference


According to new data from Statistics Canada’s 2016 Census of Agriculture, Prairie farmers are renting more and more land. In Manitoba, farmers rent or lease 33 per cent of the farmland, in Saskatchewan 28 per cent and in Alberta 42 per cent. Needless to say, they are not all paying the same rental rates and they don’t all have the same rental agreements.

Some factors affecting land rental rates are fairly obvious, like proximity to an urban centre, or the quality of the land. In some cases, land that is highly productive and can earn the renter a better return will fetch a better rental price than land that isn’t as productive. In other cases it’s simply a supply and demand scenario. Competition can inflate rental prices, just as it does purchase values.

But in addition to these economic factors, what part do human relationships play in rental agreements and rents? If the landlord comes from a farming background or is still actively farming is he or she likely to charge more rent? Does having a long-term relationship with a landlord get the tenant a better deal? Studies out of the University of Guelph have looked at some of the factors — including human interactions — that may affect land rent agreements and rents in southern Ontario.

Researchers James Bryan, Brady Deaton, Alfons Weersink and Karl Meikle of the University of Guelph have conducted two studies that looked at landlord-renter relationships and farmland ownership patterns among farmers in southern Ontario to try and assess what factors contribute to land rental prices. A survey of 240 farmers conducted between June and September, 2010 formed the basis of the research. (See at bottom: ‘Who’s in the Ontario rental market?’).

Their 2013 study, published in Land Economics in 2015, found that farmers who rented land tended to be younger and have larger farms, and most had been renting the same land for an average of 12 to 13 years.

This survey did not include farmers from Alberta, Manitoba or Saskatchewan. Economic or demographic differences may mean that rental markets behave differently in these areas.

How factors impact rates

  1. Being related doesn’t matter. The key finding of their research was that relationships between tenants and landlords do not have a significant impact upon cash rental rates (or crop share agreements). It appears renting from family members does not get the tenant a better rental rate. If landlord and tenant share social capital because of family ties, there is no more of a reason to assume that the landlord will consistently transfer funds to the tenant (i.e. by charging a lower rental rate), than the tenant will consistently transfer funds to the landlord (i.e. offer more rent). “In other words, social capital is reciprocal,” say the study authors.
  2. Term length doesn’t matter. The study also found that the number of years a tenant and landlord have had a rental agreement on a property does not influence rental rates.
  3. Landlord type might matter. The type of landlord — retired farmers, widows, non-farmers, investors, etc. — did not appear to have a significant impact on land rental rates, except in the case of non-farm investors who appear to charge, on average, 20 per cent less. A different research paper from 2011, using information from the same farmer survey, suggests there may be a correlation between how informed a landlord is about current land rental rates and what he or she charges. Active and retired farmers, who are better informed about current rates, charge more than widowers, non-farm investors and governments.
  4. Land productivity matters. Generally, the productivity of the land has more of an influence on land rental rates than landlord type. When it comes to land quality, yield appears to be the most important measure in determining rental rates. Areas on southern Ontario that consistently got higher corn yields were more expensive to rent than areas where there was greater variability in yields, suggesting that there is something of a risk premium cost associated with that land.

Contract types

Oral, cash contracts (80 per cent) were the most prevalent type of rental agreement among the survey participants, with the remainder being a mix of crop share and other arrangements.

It’s not clear why so many farm rental agreements are still based simply on a handshake, or why more farmers and landowners don’t have written contracts. “It doesn’t mean that those verbal agreements are unchecked or unbeneficial but there’s probably a reason for them,” Deaton said in an interview. “Given how broad and important the rental market is, there is still more that isn’t known than is known about it. Maybe farmers ought to move towards more long-term contracts, but to move in that direction, we need to know a lot more about the factors and reasons why the preponderance of agreements in the agriculture sector are handshake agreements.”

Starting the conversation

How do landowners and renters come to an agreement that provides security for the tenant, gives the landowner the return he or she needs, and encourages good stewardship of the land?

Farm & Food Care Ontario recently completed a project aimed at providing resources (including a website: farmlandagreements.ca) to help farmers and landowners have a dialogue that results in a mutually beneficial agreement. “We wanted to provide resources so that farmers can make a better pitch about why they would make a good tenant,” says Bruce Kelly, program manager at Farm & Food Care Ontario. “On the other side, there are resources for landowners to get informed about what agricultural terms mean, for example what does no-till or crop rotation actually mean.”

Kelly says he has heard of farmers making a PowerPoint presentation, and sitting at the landlord’s kitchen table to explain their personal farm philosophy and agronomic practices. “That opens the opportunity to say, ‘if we had a multi-year deal, this is what we would grow on your farm over the next few years and why,’” says Kelly. “They talk about nutrients, drainage, and other aspects of the farm, so if the land needs a capital improvement to make it better, they can discuss how that could be paid for in a fair and transparent manner.”

The website has videos of real farmers’ rental stories, sample rental agreements and a few examples of pricing formulas. A valuable tool is the downloadable, discussion check-list which looks at proposed farming practices, the current status of the land and structures, environmental considerations, how to measure success, and who is responsible for what, that can act as a starting point for a rental negotiation. None of the resources are Ontario-specific and they don’t get into rental rate numbers, so it’s applicable for any farm, anywhere in Canada.

“We were approached by people who rent pasture, or land for organic production, even by maple syrup producers who lease forests,” says Kelly. “In all of those cases there is a longer commitment because the renter has to put in fencing, or plant pasture, or invest in tubes and piping, and they don’t want to get thrown out in three months. Those kinds of things need to be written into a lease because a lot of rented land is from widowers or people who are semi-retired and anything can happen, they could pass away, and if the relatives want to sell the farm, the producer has to be compensated for that capital investment.”


Who’s in the Ontario rental market?

Researchers James Bryan, Brady Deaton, Alfons Weersink and Karl Meikle of the University of Guelph surveyed 240 farmers in south and west Ontario in 2010. They found:

  • Farmers who rent tend to be younger than those who don’t.
  • Farmers who rent farm more total acres and have higher gross farm sales than farmers who don’t rent land.
  • Most renters and landlords have oral contracts.
  • Most rental agreements are cash based.
  • Active and retired farmers charge more rent than those who may have fewer connections to the current rental market.
  • The relationship between tenant and landlord does not affect rental rates.
  • Length of a rental relationship does not affect rental rates.

About the author

Contributor

Angela Lovell is a freelance writer based in Manitou, Manitoba. Visit her website at http://alovell.ca or follow her on Twitter @angelalovell10.

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