Why it’s important
There can be huge differences between grain operations in how much revenue goes towards paying for land. Some land may be owned and paid for, owned but still under a mortgage, rented or sharecropped. Knowing your land costs for each field helps to determine the profitability of that property. But what about the overall land cost for the whole operation?
The easiest way to estimate a realistic land cost is to use the prevailing cash rent charge. If you own the land, this is what you would receive if you rented it out instead of farming it yourself.
Lets get started
To do a detailed field by field accounting of land costs across all acres, use the following work sheet to determine your overall average land cost per acre.
Reliable land rent information is not always easy to find. The University of Guelph and the Ontario Federation of Agriculture have partnered over the past couple of years to collect land rent and land value. OMAFRA statistics staff have also started reporting estimated land values and land rent from the Census data.
Traditionally, the rental rate to land value ratio provided a simple guideline for both rental and purchase values. Rising land values have resulted in this ratio falling to where land rent is somewhere between 1 – 2% of the purchase price. In 1991 the ratio was in the 3% range.
One way to manage land costs is to use a share crop arrangement rather than buying more land or renting. With cash rent, the farmer carries all of the risk. Some land owners are willing to participate in a share crop arrangement that spreads the risk and rewards between the farmer and owner. It also helps keep land costs in check for the farmer as the crop revenue is divided according to the agreement. When yields and or prices are great, both parties do better than under a cash rent. When yields or prices are poor, the landowner shares some of the pain and they live to ride again.
There are tools available to compare a cash rent and crop share arrangement. Using the COP numbers calculated along with a range of crop prices and yields, a comparison helps the grower and landowner to show how a share crop deal would work for both parties. This spreadsheet lets you put in your own numbers and play “what if” for different crop share or rental scenarios. Purdue Cash Rent vs. Share Crop Comparison Spreadsheet: https://ag.purdue.edu/agecon/Pages/Leasing,-Crop-Share,-Cash-Rent-Resources.aspx
Set a Goal for reducing land costs/acre:
- OMAFRA Estimated Value and Rental Rate per acre of farmland by County and Township 1991-2016
- Land Rental Rate to Land Value Ratio in Ontario
- Farm Credit Canada Land Values Report
- OMAFRA Crop Share Agreement Fact Sheet
- OMAFRA Crop Share Agreement Work Sheets
- Cash Rent vs Share Crop comparison spreadsheet (Purdue University)
“We want to know our cost of production per bushel or tonne so we can understand and know what price we need to cover variable costs. If you wait until harvest you will know the exact cost of production per bushel, but this limits informed marketing in advance of harvest.”
– Peter Gredig, Grower
“Grain marketing with or without on-farm storage requires a plan and discipline. For those with storage, the issue that can arise is defaulting to a “hold and hope” strategy where the grower puts the crop in the bin and sits on it waiting for better prices. Every grower has to find their comfort level with how much forward contracting or price taking to do before harvesting or even planting the crop.”
– Peter Gredig, Grower
OMAFRA Field Crop Budgets:
These budget sheets allow for a more detailed look at your cost of production for various crops.
AgriStability Towards Improved Profits (TIP)
Farmers who participate in the AgriStability program can request a management analysis report that looks at the information submitted for AgriStability. The TIP report compares current year performance with the farm’s 5 year average. It also provides industry benchmarks for each line item based on the type of farm and income range. It is an excellent resource to help spot outlier costs that need to be addressed.
http://www.omafra.gov.on.ca/english/busdev/facts/tipreport.htm or call 1-877-424-1300