Three consecutive years of tight margins may be making the case for crop-sharing agreements versus cash rents.
Why it matters: Beginning farmers in particular can benefit from crop-sharing agreements because they potentially ease cash-flow concerns by extending the risk of low-margin crop sales over several years.
That’s according to some analysis from Farm Credit Canada, the largest agricultural lender in the country. It found that these agreements can help non-land-owning farmers who struggle with cash flow because they more accurately reflect the typical rise and fall of cash cropping profitability, according to Leigh Anderson, a Saskatchewan-based senior economist with FCC who posted on FCC’s website.
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“Farm rents are typically sticky to adjust downward,” Anderson noted in the article “Landlords might be reluctant to lower rents because farmland values are still trending higher. Also, the rent cuts needed to improve margins could be significant, making landlords hesitant to agree to them.
“This is where exploring crop share leasing comes in as it can reduce downside risks in a tighter margin environment,” he continued. “Crop share leases better reflect both revenue and costs of production.”
Featuring theoretical examples from both wheat-and-oilseeds dominated Saskatchewan and corn-and-soybeans dominated Ontario, the article concludes that “both farmers and landowners can consider crop sharing in their broader strategies given such leases can help mitigate risks.”
Speaking to Farmtario following publication of the article, Anderson said FCC conducted a similar analysis in 2022 comparing cash rent to crop sharing agreements in the two provinces and, given the rising costs of production and land prices through three subsequent years, “we were curious to see how things look now.”
He said federal government census data indicates about eight per cent of farmland rental agreements in Canada are classified as crop sharing but adds this might not tell the entire story. There’s actually a spectrum of models available. Some arrangements use mostly cash rent structures but also maintain some level of crop-sharing for input costs and/or revenue.
Versions that combine aspects of crop sharing and cash rent might be more common for retiring farmers who want to maintain some decision-making responsibility, or farm owners who retain property to continue a family heritage but aren’t actively involved in farming elsewhere.
Anderson said there may also be cases where a farm landowner can see a taxation benefit from sharing the losses of a financially poor crop year, but this isn’t always the case.
“I’m not an accountant, and you would want to make sure you talk to an accountant who knows how the Canada Revenue Agency might view this,” he said.
For new farmers, the potential benefits of crop sharing versus cash rental can be immediately evident during years of reduced or negative margins.
“If you think about someone who’s just starting out, it can be pretty difficult for them to weather that storm over two or three years,” said Anderson. “It’s most likely they’re eroding some cash flow just to get through the low margins.”
The FCC analysis (https://tinyurl.com/24vf83h7) comes at a time of year when many farmland rental agreements are up for renewal. It offers theoretical comparisons of cash rent versus crop sharing profitability through the years leading up to 2024, plus projections for 2025.
In Saskatchewan, the analysis suggests 2025 “could be the third consecutive year of negative margins, accounting for all variable and fixed costs,” and anyone farming under a strict cash rent arrangement could experience cash flow troubles.
The 2025 Ontario projections show it will be the third year of reduced profits for a corn-soybean rotation and “while returns on average will vary depending on individual producer land costs, including land that was either recently purchased or is rented, it appears next year will be another lean year.”
The Ontario analysis indicates “a 2/3 crop share agreement (landlord contributes the land and one-third of crop inputs) improved returns during times of tighter profitability, like the last two years (2023-24) and the upcoming year.”
“We found that crop sharing was more beneficial when returns were close to negative in Saskatchewan,” Anderson wrote in the article, “while in Ontario, it was more advantageous when returns were positive but tight. This difference is due to high land costs relative to total costs.”
The FCC senior economist told Farmtario there are regions in the United States where 50/50 crop share agreements exist but 2/3 is the most common in Ontario and 3/4 agreements are seen more often in the Prairie provinces.
Crop insurance can be a complicating factor in crop share agreements, including possible disputes about whether premiums should be included among crop inputs. Payouts may also lead to questions about the eligibility of landowners who pay a portion of premiums but aren’t growing the crop.
It’s best to sort these details out beforehand, Anderson advises.
