Grain farmers in many parts of the Prairies have seen lucrative harvests over the past five years.
This has improved cash flow, balance sheet strength and overall optimism in the industry.
It has also pushed land rents to levels we have not previously seen.
This seems to have upset a lot of producers, and in some cases, rightfully so. Many farmers tend to have short-term memories and forget about the not-so-good years.
However, the producers who are paying higher rents are not all going broke, and many of them are enjoying great success.
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Here are a few ways to look at land rent and explain why certain producers are paying more, to the point where others are left scratching their heads:.
Low interest rates
It would cost about $80 per acre to finance a land purchase if land is trading at $2,000 per acre and a loan can be obtained at a rate of four percent. As a result, farmers who would be willing to pay that purchase price and the related interest on the debt should be willing to pay as much as $80 per acre cash rent and be financially no worse off than if they bought the land.
On the other hand, owning the land allows farmers to control access and they then don’t have to fear the rental contract renewal dates.
First right to purchase
Farmers might be willing to pay more to rent land on the assumption that they will receive the first right to buy it in the future.
This was often assumed in the past because it was just the right thing for a landlord to do.
However, the world has changed and it should not be assumed that you will get the first right to buy the land. I recommend discussing this with the landlord up front and putting something on paper.
Efficiency and convenience
Let’s say the a producer farms three quarters of a section and the ability to rent the last piece of land completes the section.
He might be willing to pay more for the increased productivity and efficiency of farming the entire section as one big field.
Caution
There are all sorts of reasons to pay a premium for certain land, but be careful because you might be setting a precedent.
Let’s say you currently rent 75 percent of the land you farm at $60 per acre. If you bid on a new piece of land at $75 per acre, you need to consider what that does to the overall operation.
Let’s face it, all of us who grew up in small towns on the Prairies know that your offer to pay $75 will eventually end up discussed in the coffee shop and from there all over town.
So you just gave your existing landlords an opportunity to ask for more the next time the renewal comes up.
If you rent a large portion of your land, this can increase your cost of production significantly.
Your main concern is how does renting more land, at whatever rate you plan to offer or are required to pay, impact your bottom line?.
Run the numbers with your agriculture business adviser, which should add some clarity to the decision.
You might find that paying $75 an acre is devastating to your operation and should not be done.
Or you might find that paying $100 an acre actually increases your bottom line, and therefore is a good business decision.
If you properly manage your involvement in the farm income programs that are available, you might also find that the risks of paying higher rents are lower than you thought.
