Securing rented land with the right agreement is an important part of farm planning. The approaching crop season should have farmers thinking about production plans, marketing strategies and the inputs they require to get the crop in the ground and growing. They should also be thinking about the rental contract, legal documents and an acceptable price.
Recent variability in crop prices and input costs has been unusual, as are recent extremes in weather conditions. When these factors cause fluctuations in farm income, ambiguity begins to surface in land rental agreements that are incomplete, unclear or unwritten.
The high grain prices we saw in 2008, for example, tempted some landlords into asking more from their tenants. Some landlords argued if the income from the land that they own is high, they should benefit accordingly.
The wet conditions in 2005 left many acres unseeded, unharvested, or harvested with very low-and poor-quality yields. As a result income levels suffered but farmers still had input bills to pay and loan payments to make. Some farmers also balked at making cash rent payments, arguing that the land was unusable and they should therefore be excused from payment.
The examples of 2005 and 2008 showed us two extremes. The basic understanding of a cash rent agreement is that the agreed price will be paid for the use of the land. Conditions such as weather and grain prices are generally left out of the cash rental agreement. This way, the farmer takes on higher risk and hopes for high reward and the landowner has secured a fixed return to his/her asset, regardless of markets or growing conditions.
CASH RENT IS A CONTRACT
Compare owned land to rented land. A farmer who has a mortgage on purchased land makes payments each year. The mortgage is a contract and is not subject to change due to low prices or bad weather. A cash rent agreement should be the same. The best the lender can do is to receive the payments spelled out by the mortgage and the farmer can be confident that the land payment is known. The land payment line and the land rent line on a producer’s cash flow projection should not cause any surprises after contracts are in place.
Landlords should feel equally confident about receiving payment. Landlords should be aware that there are a number of risk management programs available to farmers that will help them cover costs in years of low income. In 2005, any farmer with crops insured by Manitoba Agricultural Services Corporation that could not be seeded due to excess moisture received $50 per acre for that unseeded land. The Canadian Agricultural Income Stabilization Program was also available to help deal with declines in margins. These two programs are available to farmers, not landowners. Why? Because the landowner has a fixed return without risk. No risk, no risk management program income.
If a landlord is unhappy with the cash rent offered from area farmers, he or she has few options. Limited time, knowledge, capital or desire keeps many landowners from farming it themselves. For landowners that view farmland as a simple financial investment, selling the property and reinvesting elsewhere is always an option.
CROP SHARE COMPLEXITY
Crop sharing, once a common arrangement between landlords and farmers, gave the landowner an opportunity to share in the risks and rewards of farming. But as the cost of crop inputs rose, the typical share arrangements became unattractive to farmers. Accurately dividing each party’s share of input costs and share of revenue can be an accounting challenge. For these reasons, cash rent is the farmer’s arrangement of choice.
If landowners wish to access income protection from AgriStability, they must operate under a shared cost arrangement, similar to a joint venture. In fact, landowners who simply collect their share of revenue without sharing in the purchase of inputs must report their crop share revenue to Canada Revenue as rental income, which is not allowable in Agri Stability.
A landowner in a crop share agreement can purchase crop insurance to protect against poor growing conditions. The contract would cover the number of acres corresponding to the crop share agreement. For example, in a one-third two-thirds scenario on a 300-acre piece of land, the landowner would have coverage for 100 acres and the farmer 200 acres. This must be a pure crop share agreement. If there is any minimum charge or an agreed-to price component in the share agreement, the landlord is not eligible for crop insurance.
PUT IT IN WRITING
Whichever arrangement a farmer and landowner enter into, they are encouraged to record it in a written and signed document. The enforceability of a written contract is much greater than a verbal one. And of course, detailed contracts are better than vague, incomplete ones. In a dispute of terms the written contract will serve as a guide to each party and should be the first point of reference in resolving any dispute. Contracts have a role in litigation but one advantage of a complete, well-written contract is keeping those who signed it out of court.
For examples of cash rent and crop share agreements, contact your local Manitoba Agriculture Food and Rural Initiatives GO Centre.