Farmers and landlords are asking a lot of questions about cropland rental this spring.
Strong grain and oilseed prices have prompted landlords to renegotiate land leasing arrangements, especially those involving cash rents. It is understandable that with increased returns, higher cash rents are justifiable. The critical question is how much higher.
“Generally, throughout the province, cash rents increased 10 to 20 percent in 2007 over the 2006 rates,” said Ted Nibourg, a business management specialist with Alberta Agriculture.
“It may be safe to assume that similar increases are possible for 2008.”
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The real difficulty in determining cash rents for this year’s production lies in the scope of the price rise and landlord’s expectations.
Many landlords heard of $25 per bushel Minneapolis wheat and $17 per bu. canola in late February, and may intend to use those prices as a basis for cash rents.
Since late February, however, Minneapolis wheat has dropped in half and prairie producers must market through the Canadian Wheat Board.
Recent CWB Pool Return Outlooks indicate prices of about $9 per bu. in Alberta for No. 1 CW red spring wheat.
As well, Nibourg said Winnipeg canola has lost almost $4 per bu. since peaking in late February.
“In fact, canola has bounced up and down by over $1
a bu. during the last week of March alone. This extreme volatility in grains and oilseeds has made many a tenant nervous about settling for historically high cash rents. Producers have never seen commodity prices go this high this fast and they are waiting for the bubble to burst.”
Tenants are faced with a tremendous amount of uncertainty when price volatility is combined with cost of production increases of 20 percent or more. Production costs rarely, if ever, go down – unlike grain prices.
“What we are noticing in discussions with tenants and landlords this spring is a shift away from cash rent towards one-quarter/three-quarters crop share arrangements where the landlord receives one-quarter of the crop, but does not contribute any production costs.
Occasionally, this crop share arrangement moves towards a one-fifth/four-fifths share to reflect the higher cost of production for some crops. These shifts are based on a risk sharing arrangement between landlord and tenant.”
In this manner, landlords can take advantage of increasing commodity prices and tenants are partially sheltered from a downside price risk. In a crop share arrangement, the tenant and landlord share risk in direct proportion to the crop share. Likewise, they share any rewards in price and production.
One-third/two-thirds crop-share arrangements, which constitute about 85 percent of the crop share arrangements in Alberta, do not seem to have been affected by the volatility in crop prices.
“These arrangements have always shared risk, so nothing has really changed, except that everyone is making more money,” says Nibourg.
“Over the long term, it is not uncommon for landlords to find crop share arrangements the most profitable.”
A cautionary note for tenants and landlords shifting to a crop share arrangement from a cash basis is that both parties should agree on either a method or a date on which to price the crop and include this as a clause in their rental agreement. The extreme price volatility is bound to result in major disputes if price discovery is not considered and defined.
At the end of the day, any rental agreement, whether cash rent or crop share, is based on a negotiated settlement between a willing landlord and a willing tenant.
