I still do a lot of work directly with farm clients. As I do farm budgets or planning documents I see land rental arrangements and I am often disappointed by the lack of imagination that I see in those agreements. Very few rental agreements move beyond one of two basic arrangements:
- a fixed dollar amount - “cash rental” agreements
- a percentage of the crop, sometimes with variations involving the landlord sharing in the input costs
There are a lot more possibilities than those 2 basic flavours. Land rental is a huge cost for most successful farms on the prairies and it deserves a little more attention than it usually gets.
In the past I have seen some more creative cash rental pricing agreements involving commodity basket prices. The concept is as flexible as your imagination but essentially it involves a lease that refers to a price that is then determined by some formula that you develop. That formula might involve canola prices on July, September and January 1, the Wheat Board PROs on Feb. and August 1 and some local pea buyer’s posted price on 2 more dates. Put them all in a basket, run an average or weight the average and then multiply by some magic factor to arrive at a land rent.
| | Aug | Sept | Jan | Feb | Apr | Jul | Sum | X | Total |
| Canola | | 472 | 580 | | | 395 | 1447 | 1.5 | 2170 |
| PRO | 278 | | | 320 | | | 598 | .8 | 478 |
| Flax | | 573 | | | 680 | | 1253 | .5 | 627 |
| Peas | 773 | | 902 | | | | 1675 | 1 | 1675 |
| | | | | | | | | | 4950 |
The table isn’t intended to be anything other than an example. The final step would be to take the 4950 number from the lower right panel and divide it by another factor. In this example division by 10 might work but the final divisor could be 7.983131 or whatever other number you and your landlord agree on. The point is that you can design the formula to fit your farm. The table above is very sensitive to canola prices because it uses 3 reference canola prices compared with only 2 for each of the other crops and then it multiplies the canola sum by 1.5.
Another creative pricing agreement that works well is to base the rent on crop insurance guarantees at a fixed coverage level for the crops you grow. Again you can weight the average based on your typical cropping pattern and again you multiply or divide the result by some magic number to end up at the final rental price.
Another possibility that I have seen used less frequently but that could easily be incorporated is to tie input pricing into the formula. That’s a little more difficult because it is hard to get verifiable pricing but you can likely agree on some mechanism for that. In that case you will want to ensure that rising input prices lower the rental price. In the table above you would accomplish that by adding a row for input prices and then dividing your end result by the input factor. That way a higher input price would lead to a higher divisor which would result in a lower rent.
The important concept to remember is that this is a risk management tool, not a profit maximizing tool. I’ve seen tenants who go to elaborate lengths to devise formulas that make it look like they are sharing pricing risk but really the goal is just to screw the landlord. If that’s your goal you might as well get it out on the table and just offer $10 per acre or whatever lowball number makes you feel good. The concept of risk sharing means that in exchange for the landlord taking some of the price risk when grain prices unexpectedly drop, you are willing to give up some of the gains when prices unexpectedly rise. Its important as you design a formula that you plug in some possible prices just so you clearly understand ahead of time what impact they might have on your formula price.
Another lease concept that has a lot of merit is to sign leases with rolling terms that are cancelled by exception. Typically you sign a 3 or 5 year lease today and it expires 3 or 5 years from today. A lease with a rolling term on the other hand has an anniversary date and continues to roll forward from that date. So a rolling 3 year term signed today would have an anniversary next June. At that time if neither the landlord nor the tenant objected the lease would automatically renew for an additional year. The effect is that as a tenant you know that you have a fixed term ahead of you that you can plan for. If you want to invest some inputs you don’t have to worry about whether the lease will renew on its anniversary. The landlord benefits from the security of an ongoing agreement as well because he doesn’t have to worry about you dropping his land in tough times without giving him any notice.
I hope the sun is shining on those of you that are flooded. Even if it doesn’t immediately get better sunshine makes everything look more optimistic.