Farm Credit Canada (FCC) has released an analysis of the rent-to-price ratio for cultivated farmland in Canada. The rent-to-price ratio is obtained by crossing cash rental rates and the Farmland Values Report data. A ratio trending lower suggests that cash rental rates are appreciating at a slower pace than land values. Conversely, an increase in the ratio indicates that rental rates are increasing faster than land values. This information can help producers make decisions around buying versus renting land.
The national rent-to-price ratio in 2022 was 2.55 per cent, compared to 2.5 per cent in 2021. In Saskatchewan and Alberta, there were slight year-over-year increases. The RP ratio increased to 3.1 per cent and 2.6 per cent respectively, while all other provinces saw decreases.
“There are several economic conditions that impact the cost of renting land in Canada. Land values, the availability of land and its quality can all drive the price to rent,” explains J.P. Gervais, FCC’s chief economist.
Average provincial rent-to-price ratio 2022 and 2021
|Prince Edward Island||4.35%||5.20%|
*British Columbia did not have enough lease data to produce a confident ratio
There is provincial fluctuation in cash rental rates and land values which creates a significant range in the minimum and maximum ratios for each province. The high-end rent-to-price ratio is typically for land with the lowest value per acre in the province.
Around 40 per cent of Canadian farmland is rented. Typically, renting is less expensive than purchasing and the lower the ratio, the better the renting option becomes. For young farmers and new entrants, renting is seen as a viable option to free up capital that would otherwise be tied up in purchasing and instead can be put towards financing options for other needs like machinery or inputs.
Another important consideration when deciding whether to buy or rent is understanding the relationship between rental rates and cropland revenues. Rental rates as a proportion of crop gross revenues have declined since 2020, but crop input costs have increased significantly, putting pressures on profitability.
“Deciding whether to buy or rent is a strategic decision unique to each producer,” said Gervais. “There is a lot to consider, including interest rates, yields, commodity prices and input costs. Open communication and collaboration between landowners and renters creates a quality, long-term relationship. Matched with a risk management plan and business strategy, producers have the building blocks for success.”
Understanding the rent-to-price ratio can be a useful tool in helping producers plan, consider the economic conditions in their area and ultimately make calculated decisions for their operations.
By sharing agriculture economic knowledge and forecasts, FCC provides solid insights and expertise to help those in the business of agriculture and food achieve their goals. For more economic insights and analysis, visit FCC Economics at fcc.ca/Economics.
FCC is Canada’s leading agriculture and food lender, with a healthy loan portfolio of more than $47 billion. Our employees are dedicated to the future of Canadian agriculture and food. We provide flexible financing, AgExpert management software, information and knowledge specifically designed for the agriculture and food industry. As a Crown corporation, we provide an appropriate return to our shareholder, and reinvest our profits back into the industry and communities we serve. For more information, visit fcc.ca.