Rent to price ratio is useful benchmark

Farm Credit Canada has come out with an interesting analysis of the rent to price ratio for farmland across the country. Authored by Lyne Michaud, a senior analyst of valuation at FCC, the analysis uses cash rental rates in each province “for specific farmland benchmarks.”
When combined with their farmland values report, it provides a useful cash rent indicator.

The rent-to-price ratio is simply the cash rental rate per acre divided by the value of farmland per acre. It varies significantly from one province to the next. In Ontario, the cash rental rate per acre is only 1.45 per cent of farmland value. The highest ratio is Saskatchewan at 3.0 per cent with Alberta and Manitoba at 2.2 and 2.5 per cent respectively.

Landlords one or two generations removed from the farm often wonder about the cash rent at a particular location. “My sister and I own three quarters of land near Community X and we’re wondering if we’re getting a reasonable cash rent from our cousin. What’s the rental rate in that area?”

Unlike the sale prices for land, cash rents are not public knowledge. In fact, it can be counterproductive for farmers to share this information. If you’re renting land, you may have an idea of the going rate in your area, but you may also be flying blind.

In a few cases in recent years, the cash rent of farmland parcels has been auctioned to the highest bidder and that’s certainly public knowledge. Otherwise, coffee shop banter tends to focus on the highest cash rents anyone has heard.

It’s important to note that the price of land varies widely even within a particular region. As well, the FCC analysis shows the rent to price ratio has a wide range.

Saskatchewan has the narrowest range in farmland prices. For 2021, FCC reports the lowest average price of $1,900 an acre in East Central Saskatchewan and the highest average of $2,400 an acre in both North Eastern and West Central Saskatchewan. However, within West Central Saskatchewan, prices ranged from a low of $1,300 to a high of $4,700.

Meanwhile the rent to price ratio for Saskatchewan while averaging the aforementioned 3.0 per cent, ranged from a minimum of 1.5 to a high of 5.0 per cent. The FCC analysis notes the highest rent to price ratios are usually for land that is the lowest value in a province.

Using the 3.0 per cent average for Saskatchewan farmland valued at $2,300 an acre, the cash rent calculates to $69 an acre. On an Alberta farmland price of $4,300 an acre, that province’s 2.2 per cent rent to price to rent ratio generates a cash rental rate of $95 an acre. On Manitoba farmland worth $3,700 an acre, a 2.5 per cent ratio means a cash rent of $92 an acre.

Ontario is a different world. In 2021, Ontario farmland prices increased 22.2 per cent according to FCC analysis. That compares to increases of 3.6 per cent in Alberta. 7.4 per cent in Saskatchewan and 9.9 per cent in Manitoba. Since cash rents are often for multiple years, the rent to price ratio has a lag time.

On Ontario farmland worth $15,000 an acre, the 1.45 per cent rent to price ratio suggests a cash rent of $217 an acre.

While it certainly isn’t a precise tool, having a rent to price ratio for each province does provide a general guideline to the cash rental rates being paid.