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| Cropland rental rates expected to go up |
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| Tuesday, 29 April 2008 | |
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This spring, Alberta producers are asking a lot of questions about
cropland rental. 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 per cent in 2007 over the 2006 rates,” says Ted Nibourg, business management specialist with Alberta Agriculture and Rural Development, Stettler. “It may be safe to assume that similar increases are possible for 2008.” The real difficulty in determining cash rents for this year’s production lies in the scope of the price rise and the expectations landlords have. Many have heard of $25/bushel Minneapolis wheat or $17/bushel canola in late February, and many intended to use those prices as a basis for cash rents. Since late February, however, Minneapolis wheat has dropped in half and, in reality, Alberta producers must market through the Canadian Wheat Board (CWB). “Recent CWB Pool Return Outlooks (PRO) indicate prices of just over $9/bushel. As well, Winnipeg canola has lost almost $4/bushel since late February,” said Nibourg. “In fact, canola has bounced up and down by over a dollar a bushel 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.” Couple price volatility with cost-of-production increases approaching 20 per cent and tenants are faced with a tremendous amount of uncertainty. Production costs rarely, if ever, go down – unlike grain prices. “The high grain prices are undoubtedly tied directly to biofuel initiatives,” says Nibourg. “These initiatives are also tied to the American economy, which has had a pretty rough ride of late. All of these factors lead to a great degree of price risk for both tenants and landlords. “What we are noticing in discussions with both 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 toward 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 sheltered somewhat 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 per cent of the crop-share arrangements in the province, 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 people 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 some major disputes if price discovery is not considered and defined. At the end of the day, any rental agreement, whether it is cash rent or crop share, is based on a negotiated settlement between a willing landlord and a willing tenant. For answers to any questions about cropland leasing, give the specialists at the Ag-Info Centre a call. Their number is 310-FARM (3276). Linkback: http://www.peacecountrysun.com/News/395088.html |
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