Farmland Rental Prices: What is the Going Rate?

26 November '13

 

By far, the number one question landowners have about farmland rental prices in Canada is, ‘What’s the going rate for rental land?’ We are constantly being asked, ‘how much can I get for renting my land?’ Given the current trends in land rental, this question isn’t going away, so we've decided to answer it once and for all. 

Those with a solid farming background can be pretty good at ball-parking the price of rental land, but even with a good understanding of a particular parcel of land, nailing down a ‘fair price’ or a ‘going rate’ is anything but simple.  For landowners who don’t have the background to approximate their land’s value, it may be tempting to search for a ‘going rate’ for rental, but this approach can be misleading and problematic. 
A fair price for one piece of land does not determine what’s fair for another. Even two side-by-side parcels can have significantly different values – sometimes drastically different.

Basing a rental price off another land’s price is likely to have landowners expecting too much, or selling themselves short. Either scenario is less than ideal.  Another problem is that accurate information is really difficult to find. Rates that circulate through the grapevine may be remarkably skewed since farmers prefer not to broadcast what they’re paying; in a market characterized by tight supply and tremendous demand, who could blame them? Farmers value their privacy, and landowners do too.  So, point blank – rumored rental rates should not set your price expectations!
But isn’t there some sort of central registry that tracks rental rates? Unfortunately not. Granted, there have been attempts to survey and record rental norms, but these have been limited to particular jurisdictions and are not accessible with in-depth analysis.  There is no comprehensive source of rental rates that can tell you a fair price for your land.  
Each piece of farmland is unique and since there are so many factors affecting rental value, we’ve come up with five categories that summarize the most critical determinants of land rental prices: 
1)    Land Characteristics:

This refers to the inherent characteristics and location of the land itself, and each factor can positively or negatively impact the value:
Geographical location
Weather patterns for land’s location
Soil Type (this can change, even within the same property)
Terrain (e.g. steep hills, fence rows, flat and free of obstruction) 
Size of property
Type of farmland (e.g. crop land, pasture land)
Waterways (considerations affecting value could include: source water protection regulations, whether spring flooding restricts access, whether irrigation permits are in place etc.)
 
2) Land’s History:

This refers to what has been done to the land in the past, and how that affects its current condition. Relevant factors include: 
Tile drainage
Prior farm practices 
Nutrient profile, minerals, nitrogen, pH etc.  
Past yield and productivity
Previous crop treatments
Erosion and Compaction
These characteristics are especially critical for crop land. The soil itself can be compared to a bank account where certain farm practices make ‘withdrawals’ from the land, and others are like ‘deposits’. Failing to keep a ‘balanced’ account can leave a land’s potential overdrawn, affecting the soil’s fertility and negatively impacting the current and future value of the land. 
 
3) The Land’s Potential:
The potential for a tenant to profit from a rental agreement depends upon what can be done with the land, both in the present, and also in the future.  This could include replenishing the soil content, clearing and cultivating overgrown or covered land, transitioning land from conventional practices into organic etc. When it comes to how the land’s potential impacts rental value (and the offer price), the biggest factors come from the landowner, mainly through the lease agreement terms and the lease length.  
Farm tenants need explicit information about what is expected, prohibited and permissible throughout the duration of the lease agreement in order to assess the potential gains from renting the land. 
If a piece of land is in poor condition and requires time, effort and money to become of value to a farm tenant, having a lease length long enough for the farmer to recover these investment costs is paramount. It’s unreasonable to offer land requiring substantial inputs and have the same price expectations as quality farmland, particularly for short lease terms.  A farmer who makes improvements to the land would expect a lease length that guards their own ability to reap a fair return. 
 
4) Economic Climate:

This is a broad category that captures the prevailing trends affecting the entire sector. It includes, but is not limited to:
Interest rates
Commodity prices
Biofuel prices
Future outlooks
Recent weather anomalies, natural disasters and other production disruptions
Demographic trends 
Supply and demand balance 
Government incentives and regulations
The factors within this category are virtually unlimited and could be highly specific to particular sub-sectors within Agriculture, jurisdictions or communities. 
Each farmer will have a different scenario which will impact how their assessment of these factors translates to opportunity and reward in their own operation, which brings us to our final and perhaps most critical consideration…
 
5) Individual Circumstances of Potential Tenants:
This category can be considered the real ‘wild card’ in the land rental price discussion. When a farm tenant considers a rental arrangement, they need to take stock of all of the above-mentioned factors and determine what they mean to their unique business outlook. In particular, each operator needs to consider their individual:
Costs of production
Predicted profit margins
Expansion or contraction goals
Credit and financing position
Debt load/affordability
Equipment and labour capacity
Risk capacity & risk management strategies
Proximity to the prospective rental land
Supply chain efficiencies relative to the land’s unique characteristics
Ultimately the qualities of the physical land itself, even within the wider context of its history, future potential  and the overall economic climate cannot determine the true value of a piece of land. The individual differences in terms of the opportunity costs of acquiring or missing out on acquiring a specific piece of land cannot be predicted; they need to be discovered
So what does this mean to the landowner who’s looking to determine the value of his land? 
Simply put, the best answer to the question is: Your land is worth what people are willing and able to pay for it. It is not uncommon for there to be a big spread of difference between the highest and lowest price offered on a piece of land for this very reason. 
So the next question is: what’s the best way for landowners to determine what people are willing to pay for a particular piece of rental land?  
The answer to this question is RentThisLand.com. 
If you’re a landowner reading this blog, you’re in a good spot. Rentthisland.com’s process is strategically designed to provide you with that information based on all of the above factors. How? Because we are not a classified ad.  You don’t just post your land for rent and get hung out to dry fielding calls and emails and taking offers on your land without any idea of whether they’re fair or not. You don’t have to worry if you don’t know all of the farm-specific factors pertaining to you land, or how to interpret them into the form of an estimate. You’re not left to ball-park a price, sign a lease and find out two weeks later that there was another tenant who would have exceeded your expectations. And, when we say ‘expectations’, we mean a lot more than price. There’s a lot to consider when it comes to the value of farmland that goes well beyond price. 
RentThisLand.com’s innovative offer process lets owners of farmland receive offers on their land, relieves uncertainty about the best price, takes away the discomfort of handling awkward price negotiations, and most importantly - gives complete flexibility and control to pick the best tenant match!

It’s your land. It’s your choice!
For  present or future farmland operators, RentThisLand.com has unique features to give you access to information about rental opportunities and lets you make offers on the land you want, while highlighting the unique features of your operation that would make you the best tenant choice! 
Follow this link to see how the Rentthisland.com process for matching landowners with farm operators works.  
Stay tuned for more posts about this topic. Do you have questions you'd like us to tackle in a future post? Leave us your comments below!
 



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