They discussed their recent policy papers on what Canadian agriculture needs for economic stability and productivity in a recent webinar.

Courtney Anderson, Dislène Sossou and Andu Berha highlighted the financial benefits and challenges of adopting soil conservation practices, the impact of climate change on agricultural production and how federal and provincial farm insurance programs are — or are not — mitigating these effects.

Impact of land values

Anderson took a high-level look at the economics of farmland use — including returns from farmland compared to land purchase and rental costs — and what rising farmland values means for the longevity of the sector.

Overall, Anderson reaffirmed that Canada’s farmland is currently in “long-term decline” from development and other pressures, that farmland rental rates have caught up to farmland value appreciation in most areas of the country, and the appreciation of the value of most farmland alone “does not provide a high-enough all-in discount rate of return for most investors.”

Farmland rentals, says Anderson, offer a strong potential additional return on investment to those owning farmland, but come at considerable risk and uncertainty for the renter. Speaking during the CAPI event, he says statistical data indicates rental costs siphon some 90 per cent of operator income, leaving only 10 per cent to cover all other production expenses. This, he says, indicates strong competition in farmland rental markets.

Given the competition for farmland, Anderson argues a better understanding of what future generations will require to invest in farming — whether through renting, purchasing or other methods of farm investment — is needed. He also points to policies from different regions across the country, which have restricted land ownership, as possible models by which farmland can be conserved in other areas.

What drives adoption of new practices

Sossou’s research focused on what drives the adoption of more environmentally minded production practices in vegetable systems, something she says is ever more important as consumer demand for domestically grown produce spurs growth in the vegetable sector.

Because vegetable production often necessitates the intensive use of inputs, tillage and other elements of production mechanization, says Sossou, soil health degradation is a growing concern. The adoption of soil conservation practices helps remediate these issues, while often reducing production costs for the farmer.

However, many vegetable farmers are still reluctant to adopt soil conservation practices due to financial constraints, implementation challenges, access to information, market access, non-targeted support and general negative perceptions of some practices.

These perceptions are not necessarily unwarranted, given that economic and environmental goals don’t always align on the farm. Sossou details how “there is a potential tension between economic sustainability (via succession planning) and environmental sustainability (via Environmental Farm Plans),” adding policymakers or advisors “need to balance both objectives when designing conservation programs.”

Policies promoting the adoption of soil conservation practices should also account for farmer crop specialization, including recognition of the soil nutrient requirements for the vegetable in question.

Additional recommendations to increase the adoption of effective soil conservation practices include expanding technical assistance and market access for vegetables demanding particularly high levels of soil nutrients, enhancing supply chain integration and connecting farmers with wholesalers or processors preferring vegetables grown with soil conservation practices, designing irrigation and incentives policies for a balanced land-use strategy and implementing policies to sustain an effective workforce for labour-intensive crops.

Different farms, different insurance programs

Berha’s work highlights how a one-size-fits-all approach to production insurance programs is increasingly costly, as well as ineffective at promoting change on the farm.

When the climate is good — that is, when poor and extreme weather has not been the norm — Berha says farmers tend to specialize in a few high-performance crops in pursuit of high returns. This occurs at the expense of greater crop diversity, which, while often being less profitable overall, helps protect farmers in the face of an unfavourable climate. Diversification only happens after the onset of poor conditions.

There is thus “a clear trade-off” between sustainability and productivity, says Berha. The imbalance in that trade-off is costing farmers and insurers a lot of money, with Canadian farm insurance payouts jumping from $1.9 billion in 2018 to nearly $5.7 billion five years later — a cost surge that has occurred alongside more extreme weather.

A means of reducing insurance costs involved is complementing current business risk management programs with “resilience built in.” This would include promoting climate-resilient crop choices and farming practices, as well as addressing different risks faced by farmers in different regions.

Berha identifies four additional means of improving insurance programing. This includes a guarantee of prompt payouts to meet cash flow needs, scaled coverage to better match losses — special mention is also given to the upward adjustment of coverage caps and top-ups to reflect greater risk during more extreme weather — simplified paperwork processes, and greater transparency through the publishing of an annual business risk management performance dashboard, which includes reporting payout times, approval rates and regional uptake.

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The governments of Saskatchewan and Alberta used to publish surveys on land leasing in the two provinces. The last time that happened was 2019, so rental rates in those publications are out of date and under-valued.

For instance, in Red Deer County in central Alberta, the survey found cropland leasing rates were around $75 per acre.

Renting that same farmland could be 40 to 50 per cent more expensive in 2025, but it’s difficult to even make a guess because land rents are a “dark market,” said Darren Bond, a farm management specialist with Manitoba Agriculture.

“We do have some rules of thumb, but it’s all dependent on the area,” he told Country Guide in 2024.

One rule of thumb is rent versus land values. In a report published last year, Farm Credit Canada found the ratio of farmland value to rent is around 2.5 per cent.

That percentage varies by province, but it’s a rough gauge to understand if farmland rents are pricey or cheap. If the average cropland value in a region is $4,000 per acre, then a reasonable rent could be $100 per acre.

Land values exploded in many parts of the Prairies from 2020 to 2024. FCC data show Saskatchewan farmland prices increased 41 per cent from 2020 to 2023. In northeastern Saskatchewan, cropland increased 10, 15 or 20 per cent every year.

For a while, in 2022 and parts of 2023, renting was possibly a bargain compared to buying farmland in certain regions.

“At this point in time, from my conversations … (rental rates) have now caught up,” said Bond, who spoke with landlords from across Manitoba last fall.

Land rental rates could be important in 2025 as grain producers deal with lower grain prices and relatively high input costs.

Using canola as an example, the operating costs of growing canola is around $418 per acre, Manitoba Agriculture said in its 2025 cost of production guide:

If rent is $110 per acre, the cost (not including machinery or labour) rises to $528 per acre.

Assuming canola is $13.50 per bushel, 39 bu./ac. is the break-even yield for growing canola on that rented land. A favourable rental agreement could be the difference this year in a profit or loss.

Despite the amount of money involved, a percentage of land leasing is still done through handshake agreements. Some experts warn that producers and landlords should instead have a written agreement, which provides security for both sides.

Others say it’s crucial to maintain a personal relationship with a landlord.

“Get in the truck, go drive to their house, sit down with them, have coffee, have a meal, have a drink, block the afternoon off,” Ted Cawkwell, a farmland realtor in Saskatoon who runs the Cawkwell Group, told Country Guide.

“It’s going to be pretty hard for them to leave if they feel like you’re their friend. Even if the neighbour offers them more money, my guess is if you’ve built that relationship, it’s not going to matter.”

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That’s according to a recent online article by Farm Credit Canada (FCC) that delved into the dollars and cents of the renting-or-buying decision.

Generally, the cost to rent farmland is lower than financing a purchase, making renting a worthwhile option to explore, FCC said. It can support cash flow and minimize financial risk to the overall farm operation.

The best way to analyze this decision is what’s known as the rent-to-price ratio, which is the cash rental rate per acre divided by the value of that acre of land. The result is a ratio that is measured as a percentage.

For example, land worth $5,000 an acre, with a rental rate of $100 an acre, would have a rent-to-price ration of 2.0 per cent.

The largest increase in farmland values in 2023 were in Saskatchewan, Manitoba, and Quebec. With rental rates rising at a similar pace overall in those provinces the ratio remained stable. Alberta had a rent-to-price ratio of 2.4 per cent in 2023, down from 2.6 per cent in 2023. Saskatchewan was at 3.1 per cent both years. Manitoba was at 2.4 per cent both years.

The national rent-to-price ratio in 2023 was 2.52 per cent, a slight decrease from 2022. The lowest rent-to-price ratio provincially was Ontario, at 1.25 per cent in 2023, compared to 1.4 per cent in 2022. The highest was Prince Edward Island at 4.35 per cent in 2023, unchanged from 2022.

In 2022, Ontario saw the highest increase in farmland values with an average 19.4 per cent increase, with a more modest increase of 10.7 per cent in 2023. With the RP ratio decreasing this year, this indicates that cash rental rates agreements have not evolved at the same pace as farmland values.

Similar results were observed in Atlantic provinces with the rate of increase in rental agreements being lower than the rate of farmland value appreciation in both New Brunswick and Prince Edward Island. These provinces experienced higher than average increases in farmland values in 2022.

Cash rental agreements are often negotiated for longer periods, which encourages better land stewardship and more predictability for both parties. There is also considerable fluctuation in each province’s cash rental rates and farmland values. The high-end RP ratio is usually seen on farmland with the lowest value per acre in the province.

Specialty crops, like potatoes, are generally negotiated at higher prices than other crops.

Renting farmland can complement land purchases and is often part of long-term strategic growth plans, FCC says, but a lot goes into that decision.

Rent or buy?

Renting may be part of the business strategic plan when an operation is looking to expand their land base and grow their operation. Buying land can tie up available capital and reduce cash flow, leaving fewer financing options for machinery, input needs or future expansion opportunities.

While there are obvious advantages of land ownership, cash flow remains a key consideration for producers, as this is tied to the ability to service debt and maintaining agility for capitalizing on opportunities, FCC says. The difference in per acre profitability is generated by subtracting the cost of renting land from a newly purchased land cost, assuming a 25 per cent down payment and 25-year amortization length.

Since 2021, the three Prairie provinces have seen an increased cash flow benefit from renting land compared to purchasing. In 2023 in Alberta, rented ground returned $160 per acre more than newly-purchased land. The same story holds true for Manitoba as the per acre difference in profitability due to renting has doubled since 2020.

Saskatchewan has also seen the advantage grow for renting over owned land as well, but with smaller results.
Ontario and Quebec producers have also seen higher cash flow advantages when moving to rental agreements compared to newly purchased land. Ontario’s rent advantage was 2.5 times higher in 2023 compared to 2020, while Quebec is 2.1 times higher.

While the cash flow advantage of renting over financing is significant, producers need to understand their cost of production before entering into a new land rental agreement to ensure it meets the needs of their operation.

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Landowners are the oldest in history, there are all-time-high land values, and the cash flow to acquire land is outside of long-term profitability, according to Bohr.

The next generation of producers, Bohr says, looks like this in Iowa:

• 68 per cent of farmers have no children who currently farm.
• 51 per cent of farmers have not identified a successor.
• For each farmer under the age of 35, there are six over age 65.

I see an opportunity here for young farmers to be developing relationships with non-related parties.

Bohr uses a worksheet to also put out the idea that there is a price to buy family land (discounted after debt) — what he calls “family land value,” not fair market value. I call this “fair family price.”

READ MORE: Prairie farmland values continue to increase

Regardless, the hard conversations are around expectations about who can purchase farm assets, and who can afford to cashflow the purchase of farm assets.

The other part of this storm is the expectation of parents to divest farm assets to give gifts or inheritance to non-farm heirs. Somewhere the perfect storm is begging a new money script from parents as to what is a reasonable expectation for the transfer of farm wealth — that is, if the family really wants to keep the farm business intact.

Bohr’s solutions:

• Know your role as a landowner, producer, or interested third party. Bohr talks about a century match, leasing agreements, advisory role and non-operating landowners. He is skilled at helping match retiring farmers to the next generation of landowners. This is your chance to tell your story often and build relationships with bachelor farmers, or farm owners who have no successors, to create new non-related partnerships. (Read my blog on landlord relationships.)
• Partner for economies of scale. Share equipment, use input buying groups, and gain financial benchmarking data with peer networking groups. Terry Betker of Backswath and Rob Saik of PowerFarm have used these groups well in Western Canada to help farmers grow with group coaching.
• Understand how to use the tools in your toolbox. Examples include corporation shareholder agreements; beginning farmer programs; investment strategies for buying land; and in the U.S., basis step-up.
• Understand tax brackets, bonus depreciation and lease-to-own leases. (Ask really good questions of your accountant and ask for clarification when you don’t understand!)
• Understand the marketplace. Options for the land include farmer ownership, division of land, corporate land, trusts, and combinations of those options. Give heirs a reason to want to own land, and let siblings “row the boat together” to have skin in the game with the success of the farmland ownership. Discuss the different approaches and outcomes with fair market value versus family market value. What are workable options for keeping the land together?
• Be prepared for understanding the consequences of your transition decisions — for example, will probate.
• Prepare to compete with the “big boys” — the farmers with ability to buy land. Are you developing land acquisition strategies with neighbourhood relationships and well-written leases? Landowners are looking for stewardship and care of the land. They want to share similar philosophies for farming and a nice person to work with. Producers want a long-term relationship and a way to learn and carry on their legacy while providing a great way of life for their family. Dick Wittman, an instructor with Texas A&M’s TEPAP ag executive program and farm management specialist from Idaho, would argue there are lifestyle farmers; those farmers who need to join forces with other producers; and then the “big boys.”
• Farm without the bank — that is, have working capital more than 100 per cent of income. Dr. David Kohl, from Virginia Tech, would love this recommendation. How much are you protecting and building working capital?
• Understand the difference between an “exit” strategy — when the farmer spends down the business over time with the intention of liquidation — and an “entrance” strategy, where you are growing into the operation to earn respect and trust. In Canada we call this the “successor effect,” where the young farmer’s passion to farm drives growth of the farm to support more than one family. Bohr also visualizes an entrance strategy where young farmers approach a mature landowner with a business plan. Whatever approach you take, ask for help! Network with key people and find a way to partner with a mentor.
• Identify what matters and what you can control. Does your family serve the business, or does the business serve the family? Be clear about what you are focused on, then execute.

Book some time to chat with Steve Bohr at 1-800-375-4180 or visit the Next Generation website for more information. I found his challenges and ideas refreshing, as he is practical and highly experienced in seeing scenarios that can work. Whether you farm in Canada or the U.S., there are nuggets here for you to weather the storm and be the captain of your own ship. Ask for help!

Steve Bohr’s “farm succession perfect storm”

1. Age of landowners: 60 per cent over 65.
2. All-time-high land values.
3. Cash flow to acquire land is outside of long-term profitability.
4. Farm is a legacy asset.
5. Control is difficult to surrender, but is required to transfer for transition.
6. Quality of advice from specialists may be limited by location, experience and incentive.
7. Interest rates are changing and becoming higher.
8. Longevity of landowners will see the “sandwich” generation losing ownership opportunities.
9. Family fights over “fair” versus “equal” are needing to view performance-based pay versus inheritance-based pay.
10. Farming is difficult, and each generation produces fewer farmers who are willing or able to take risk.
11. Tax law uncertainty with estate, income, capital gains (and basis in the U.S.).
12. The deferral mentality: procrastination causes owners to be susceptible to emotional decision-making mixed with greed, hope and fear.

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The breakdown: she has non-farm assets of $419,000, savings of $400,000 plus a TFSA with assets of $100,000, and other savings of $800,000. Her annual retirement needs at 65 will be $60,000.

Teresa inherited her parents’ farm five years ago. She wonders how to manage her taxes efficiently and pay herself an adequate retirement income. Her farm, in southeastern Manitoba, is financially productive. Her problem: retaining value and generating income in her retirement. Teresa has sufficient assets to pay herself an income of $5,000 per month for the rest of her life.

The question is, what’s the best way to generate this income? According to Colin Sabourin, a senior advisor and certified financial planner with TransCanada Wealth Management in Winnipeg, the solution requires both tax and investment management.

Colin notes that Teresa currently receives all the farmland net rental income. That rental revenue, both corporate and personal, of $55,000 flows through the corporation. She isn’t being taxed personally on the rental income from the personal farmland due to this.

She’s currently withdrawing $5,000 each month from a joint savings account she has with her husband. This leads to an average of $5,000 per year in capital gains being triggered. Between her current savings and joint savings, she’s having to declare approximately $35,000 of annual interest income. The corporation is also paying her a wage of $10,000 a year.

In total, her taxable annual income is currently around $47,500. She isn’t taking CPP (Canada Pension Plan) or withdrawing from her RRSPs (registered retirement savings plans) yet.

Teresa is sitting on quite a few assets. Sabourin recommends she work to increase her taxable income to $79,626, as in Manitoba, that’s where the combined federal tax bracket goes from 33.25 per cent to 37.9 per cent. Any taxable income earned above $79,626 gets taxed at the 37.9 per cent rate. It makes sense to maximize Teresa’s lower brackets and take advantage of the lower tax rates.

The plan

Start having the personal farm rental income taxed personally. Currently the income from her personal farmland is being taxed corporately. Since rental income is considered passive income and not active income, it’s being taxed close to 50 per cent. By moving this income to her personally, she’ll only be paying tax at the 33.25 per cent rate.

Then, increase her wage from the corporation. Teresa is short by $3,126 to maximize her tax brackets, so she should increase her salary by this amount, to increase her taxable income to $79,626 for the year, Sabourin recommends.

Tax planning in the future

Teresa is currently not receiving CPP or OAS (Old Age Security), nor making any withdrawals from her RRSPs. This is all income that’s going to start being added to her income in the future. She can choose to start CPP at any point between now and 70 years old; OAS, 65-70; and her RRSPs need to be converted to a RRIF (registered retirement income fund) by 71, with her first withdrawal being forced at age 72.

Teresa will need to be aware of the OAS clawback which currently starts at $86,912 for the 2023 tax year. The clawback will increase with inflation, so we assume a 3.5 per cent inflation rate over the next two years; the clawback will be around $93,100 by the time she turns 65 years old. Every $1 you make above the OAS clawback threshold, you need to repay 15 cents of your OAS, so it’s quite a high tax cost.

If Teresa starts to take CPP and OAS at age 65, this will add an additional $20,000 to her income. If we combine this new income with my recommendation of increasing her income to $79,626, she’ll be way over the OAS clawback threshold.

Recommendations

• Consider deferring when she starts her OAS and CPP. The longer Teresa waits, the higher the OAS clawback will climb due to inflation. However, how much she receives from CPP and OAS will also be increasing, as you get a bonus by deferring it, so this strategy wouldn’t completely avoid OAS clawback. Furthermore, the question of deferring CPP and OAS always comes back to: what’s your life expectancy? It doesn’t make sense to defer if you believe you won’t live well into your 80s. In Teresa’s case, she has longevity in her family, therefore I’d be comfortable recommending she defers it.
• Consider changing how her investments are positioned. Currently, she is generating interest income. She’s forced to claim this income every single year and it’s 100 per cent taxable. Assuming she’s comfortable with buying stocks, her annual taxable income would be reduced because her stocks would be generating dividends and presumably capital gains, both of which are taxed less than interest income. By reducing her interest income and converting it to dividends and capital gains, she’ll lower her taxable income under the OAS threshold.

Once Teresa is forced to start making withdrawals from her RRIF, it’ll be harder to keep her income under the OAS clawback. Currently, if you’re 72 years old, you’re forced to withdraw 5.4 per cent of your RRIF annually, with this figure increasing every year. Assuming Teresa’s RRSP grows at a rate of five per cent over the next nine years, her minimum withdrawal at age 72 will be approximately $21,000.

Based on Teresa having a higher income in the future, it’s even more imperative that she takes advantage of her lower tax brackets while she can. The more taxable income she declares today at lower rates, the less she’ll have to declare at higher rates in the future.

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Farm Credit Canada’s latest analysis of farmland rental prices says they’re roughly maintaining their traditional linkage, says J.P Gervais, the organization’s chief economist.

“We were curious to see whether that would bring up land rental rates faster,” Gervais said. “Not yet, it appears. Land rental rates seem to be moving roughly at the same speed as land values.”

Why it matters: Understanding the rent-to-price ratio for farmland can help farmers decide whether renting land is a more viable option to free up capital for other needs.

However, there could be a lag in the effect that interest rates are having on the market. “I think we’re going to find out,” Gervais said, but pointed out it could take the better part of this year before it becomes apparent.

Incidentally, he said, while financial markets are predicting a rate decrease as soon as October, he sees that as overly optimistic. “We’ve had a pretty strong labour market, which is sustaining consumer spending,” he said.

“Yes, inflation is coming down, but the economy is still moving forward right now, and a lot of us thought that we would have seen a slowdown already, but we haven’t; the economy is more resilient than everybody expected. I think it’s a bit premature to say that we’re going to get a rate cut as soon as October. I’m starting to doubt even that’s going to happen in December.”

But interest rates are just part of a collection of market pressures affecting rental rates, he said. “There are several economic conditions that impact the cost of renting land in Canada. Land values, the availability of land and its quality can all drive rental prices.”

In mid-April, FCC released its annual analysis of the rent-to-price ratio for cultivated farmland in Canada. Across the country, the rent-to-price (RP) ratio in 2022 was 2.55 per cent, compared to 2.5 per cent in 2021. In Saskatchewan and Alberta, there were slight year-over-year increases. The RP ratio increased to 3.1 per cent and 2.6 per cent respectively, while all other provinces saw decreases.

FCC calculates the ratio by dividing the rental cost per acre by the land value per acre. A ratio trending lower suggests that cash rental rates are appreciating at a slower pace than land values.

Around 40 per cent of Canadian farmland is rented. Typically, renting is less expensive than purchasing, and the lower the ratio, the better the renting option becomes. For young farmers and new entrants, renting is seen as a viable option to free up capital that would otherwise be tied up in purchasing and instead can be put toward financing options for other needs, such as machinery or inputs.

Ultimately, the reason FCC began tracking the RP ratio three years ago was so that it could become a tool to help farmers decide whether renting is the right option for them.

Another important consideration when deciding whether to buy or rent is understanding the relationship between rental rates and cropland revenues. Rental rates as a proportion of crop gross revenues have declined since 2020, but crop input costs have increased significantly, putting pressure on profitability.

“We know that we have lower prices than we had last year,” Gervais said. “So, margins are likely to be lower.” Input costs increased significantly last year but have come down a bit this year.

“I don’t think that the decline is that significant, since, if you look at fertilizer prices, they’ve been trending down, but some of it has already been purchased. The bottom line is, those margins are tighter,” he said.

That said, Gervais warns against making snap decisions based on only a small part of the picture. The decision to purchase or rent land can have long-term implications.

“Do you have your strategic plan in mind? Where do you want to take your farm five years from now? What are the targets you have in mind?” Gervais said. Farmers will sometimes just look at the price differential and interest rates and pull the trigger if their costs per acre can be reduced a little.

While that’s an important factor, he says it shouldn’t be the determining factor. Gervais recommended that farmers stick to their five-year plan and only make decisions if they fit within that plan.

“If you start out looking beyond year one and have that five-year perspective, I think that opens up a bit of a different discussion and maybe different decisions, even facing the same set of numbers,” he said.

The Ontario Agricultural College at the University of Guelph, which surveys and analyzes farmland rents, prices and ratios in that province each year, cautions that rental rates and land values can vary considerably on a given parcel’s specific characteristics, limiting the RP ratio’s use as a guideline.

Also, OAC notes in its most recent survey report, such a ratio doesn’t account for “a host of important factors” such as property taxes and the rate of land appreciation over time — but is nonetheless useful for farmers wanting to compare and assess the returns on a land asset.

“Deciding whether to buy or rent is a strategic decision unique to each producer,” Gervais said. “There is a lot to consider, including interest rates, yields, commodity prices and input costs. Open communication and collaboration between landowners and renters creates a quality, long-term relationship. Matched with a risk management plan and business strategy, producers have the building blocks for success.”

— Don Norman reports for the Manitoba Co-operator from Winnipeg. Includes files from Glacier FarmMedia Network staff.

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