Leased land can fuel your expansion
Not a day goes by that RBC Royal Bank Farm Finance Professionals aren’t talking about growth. In some cases, younger clients are looking to get established in agriculture on a full-time basis. In other cases, more established farm operators want to expand. The conversation quickly goes to the issue of land: where to find it, how to use it and how to pay for it.
At one time, farming and land ownership went hand in hand. For many, they still do. Others, however, have long questioned the need to own land in order to farm it. These producers plan to start farming, or grow their operation, with more leased land and less owned land. I’m inclined to think this can be a smart strategy.
Consider the number of people who will exit farming over the next 10 years, plus those who have done so over the past 10 years. You have lots of people farming today whose kids have moved to Regina or Calgary or Halifax or Toronto – and might or might not eventually come home to farm. When you put these factors together, there could be an ample supply of rentable land in many parts of Canada.
This approach can also make great sense for landowners who want to retain ownership while generating a stream of income for a number of years. With the right professional advice, this can be set up in a tax-efficient manner.
The key for both the landowner and the potential renter is to understand the needs of the other party in order to develop a long-term, win-win situation. If you get two years into a five-year agreement and someone’s unsatisfied, the resulting instability can hurt both owner and renter.
The fundamentals apply
For the producer entering into a lease, it’s vital to know your costs, know your input needs and have a well-considered business plan. You need to know what the land you’re renting or leasing is capable of, and what has been done with it in past years. Your analysis should include the cost of any improvements – such as storage – you’ll require in order to make the new land work with your style of farming. A comprehensive marketing plan should allow for robust risk management, including selling a portion of your production by seeding time.
The economic argument for expanding a land base often makes great sense. You can spread fixed costs over more acres, qualify for quantity discounts and possibly diversify the number of crops you grow. These goals can all be accomplished by renting or leasing land, rather than assuming the risk of owning it.
If you have any questions about land acquisition, I invite you to discuss them with your account manager. On behalf of RBC Royal Bank, all the best for your farm and family this spring.
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