Farm Credit Canada has been studying farmland rental rates as compared to farmland values.
Data shows the national rent-to-price ratio in 2023 was 2.52%, reflecting a negligible decline from the previous year.
FCC Senior Economist Justin Shepherd says in 2023 we saw some fairly strong farmland value growth across the prairies, especially in Saskatchewan as well as Manitoba,
while Alberta had a little bit slower growth, but it was still positive.
"What we see in the actual rental rate data is that Saskatchewan and Manitoba, their rental rate or their rent to price ratio that we talked about in the article has maintained. So that means that if Saskatchewan farmland values were up 10 per cent, it means that the rental rates were up about 10% as well to keep that ratio unchanged. In Alberta, we actually saw a slight decline in that ratio. So that means that farmland values increased at a slightly quicker pace than did the actual rental rate in that province."
He points out the rent-to-price ratio on cultivated land in Manitoba and Alberta is 2.4 per cent, while Saskatchewan is a little higher at 3.1per cent
"I think that's partially because the actual price of farmland is worth a little bit less than Saskatchewan. So the rental rate and then there's a bit more demand for rental properties there. So we see a little bit higher percentage."
The farmland rental rate analysis leverages insights from data sets on cash rental rates and the Farmland Values Report.
Rent to Price ratio analysis
Rent to Price (RP) ratio (measured in %) = Cash rental rate per acre / Value of cultivated farmland per acre
With FCC's ratio, trending lower suggests cash rental rates are appreciating at a slower pace than land values, while an increase indicates that rental rates are increasing faster than land values.
Overall, the price of farmland whether to buy or lease depends on the region, the soil type, if it is irrigated and the potential for the type of crop being grown.
Shepherd says there are a number of factors to consider when looking at making any land deal but it all starts with knowing your cost of production and evaluating the risk potential to see if it fits into your operation.
"Is it nearby existing land, or it allows them to diversify? Then there's also demand for rental agreements, where producers are able to expand their land base without taking on too much debt. Also as we show in the analysis there could be a potential cash flow advantage by choosing to rent over land purchases, at least in the short term."
J.P. Gervais, FCC’s chief economist says renting land can serve as a strategic way for new entrants to get established or grow their operations without being burdened with all the upfront costs that come with land purchases.
To hear Glenda-Lee's conversation with FCC's Justin Shepherd click on the link below.
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