Grain and oilseed market fundamentals point toward “very little movement” in Alberta’s cropland rental rates for the 2009 season.
Farm business management specialist Ted Nibourg of Alberta Agriculture and Rural Development’s Ag-Info Centre at Stettler said in a provincial newsletter this week that markets “seem to indicate a rather uneventful year as far as grain and oilseed prices are concerned.
“Grain prices have been tied directly to biofuel initiatives for the last few years, resulting in very strong prices. With the current global economic reset, this price relationship has all but disappeared.”
“At this time last year, markets were forecasting strong grain and oilseed prices, which prompted landlords to renegotiate land leasing arrangements, especially those involving cash rents,” AARD noted.
“It is understandable that with increased returns, higher cash rents were justifiable. The unfortunate reality was that those high returns disappeared by harvest time.”
Equally understandably, farming tenants now want to know how to renegotiate their leases to reflect diminished returns and drastically shrunken margins, the province said.
AARD’s preliminary 2008 survey of crop rental rates, released in December, indicated an increase of about 10 per cent in the 2008 rental rates over the 2007 rates in responding municipalities, but “certainly not the 20 to 30 per cent increases anticipated last spring.”
For farm tenants who would like a “more definitive” rate than the survey offers, a formula approach works the best, AARD said. To arrive at a rental rate tied to the productivity of the land, take one-quarter of the average or long-term yield of a given crop and multiply this by an anticipated price. This result should be further discounted by 25 per cent to cover risk, uncertainty and timeliness of payment.
For example, in an 80-bushel barley crop, 20 bushels represents a quarter of the yield. Using a $3 per bushel price, one arrives at gross value of $60. Discounting the $60 by 25 per cent results in a rental rate of $45 per acre for cash rent.
“The most profitable”
“What was noticed last spring was 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,” Nibourg said.
“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 landlords and tenants. Landlords can take advantage of increasing commodity prices and tenants are sheltered somewhat from downside price risk.”
One-third/two-thirds crop share arrangements, which make up about 85 per cent of the crop share arrangements in the province, didn’t seem to have been affected by grain and oilseed market volatility, Nibourg said. “Over the long term, it is not uncommon for landlords to find crop share arrangements the most profitable.”
That said, farmers and landlords shifting to a crop share arrangement from a cash basis or for those using the formula approach for calculating rent, it’s best that both parties agree on either a method or a date on which to price the crop and include this as a clause in their rental agreement.
“Price volatility is bound to result in some major disputes if price discovery is not considered,” the province said.
