Why farmland is priceless

Most landowners look to soil quality and commodity prices to determine how much rent farmers should pay them. They often get it wrong.

In 2008, Lyndon Lisitza’s parents sold their farm, in Saskatchewan, to a Canadian energy group. The company’s primary aim was to explore for gas, but its plan also involved renting out the farmable ground to generate extra cash. Yet the firm, based hundreds of kilometers away, didn’t know anyone in the area. Finding prospective tenants rapidly proved a tricky endeavor.

From there emerged a business idea: in 2012, Lisitza founded Renterra.ca, an electronic farmland rental auction platform dedicated to the Canadian market. Renterra now counts 5,000 active users, a 10th of which are landlords. Lisitza is currently rolling out FarmRenter.com, its US counterpart, which launched in August and just completed its first auction. He is hoping to garner more than 20,000 members by September, the beginning of the 2018-19 rental season.

The two renting markets have surprisingly little in common. One major difference is scale: US farmers rent about 350 million acres across the country – about 10 times more than Canadian peers. Crops also vary markedly. Whereas canola, wheat, barley and lentils are common in Canada, the US is big on corn and soybeans, which require warmer climates. That dictates the revenue farmers typically get from their land: $50 per acre on average in Canada, Lisitza says, compared with $200-$300 in the US. That gap is reflected in rents.

There is one thing, however, that’s shared across North America: many landowners are surprisingly clueless about what they can earn from renting their asset. Commodity prices, of course, are an important consideration in determining rents. When corn is in the doldrums, as it was at the start of the last US cropping season, farmers have less to spend on hiring their land. Soil quality also matters: the better the hoped-for yield, the higher the expected profit.

Yet these two factors leave the equation incomplete. All farmers follow the same method to calculate the value they attach to a given plot: they work out the maximum amount they can afford to fork out to achieve their profit margin. The issue, Lisitza points out, is that every farmer has a different profit function. “Their margins are all different,” he says. There are plenty of reasons for that, starting with uneven management skills and varying scales of operations.

The proximity factor also comes into play. But even this tends to be a subjective notion. In the past, farmers’ willingness to pay was highly correlated with how close they were to a given patch of land, because transporting equipment over long distances is costly and time-consuming. The correlation still holds true, but it has become weaker: as farming consolidates and producers invest more in machinery, renting a plot that’s miles away can be worthwhile if it helps bring operations to full capacity.

“At the end of the day, there is no set price,” Lisitza notes. “What it really comes down to is what the value of that land is for the farmer who wants to farm it. What is his willingness to pay?”

Auction systems, which have existed for centuries, are an attempt to optimize that price discovery process. They’re acquiring greater potency in the digital age: farmers located within a 40-mile radius, receiving instant notifications, are able to bid in just a few clicks. Which is just as well, Lisitza argues: in the US, 80 percent of the land available for rent is owned by non-farming landlords. As the market’s online migration creates more tenant competition, many will be relieved they won’t have to pick up the tools themselves.

Write to the editor at matthieu.f@peimedia.com