Just like many businesses, farmers often rent out at least a portion of their land. However, for a farmer, tenancy is a much more complicated matter than a business owner renting out her storefront.
Depending on the agreement, land-owners can either create a:
- Crop share – be part of the farming process
- Cash lease – be more like a landlord
In order to create an ideal solution for both sides, the tenant and landowner may even develop a hybrid agreement, making the matter even more complicated.
So what’s the best option? Crop share or cash lease? The answer: it depends.
Each farmer, and each landowner, has a different set of goals in mind, and so both parties gravitate towards solutions that will most positively affect them. Depending on the farmer’s situation, and that of the landowner, different agreements will be more or less beneficial.
A cash lease is much like rent – the farmers pays the landowner a set amount, then works the land.
Often, the farmer will pay the landowner a simple price per acre, insulating the landowner from the volatility of farming.
However, due to the volatile nature of farming, and the unpredictable nature of both mother nature and the markets, farming runs through cycles of boom and bust. To help compensate for these cycles, landowners and farmers may factor these fluctuations into the price of the land, establishing a variable rate for the lease. This means the farmer may pay a little less during down years, but it also means they pay a little more with a bumper crop.
In a cash lease, the landowner leaves the farming to the farmer, allowing him to make the calls, sell the product and take care of everything else. This also means the landowner is not considered to be part of farming, and thus cannot take advantage of any programs designed to help farmers. This can be avoided if the landowner enters a ‘joint venture’ with the renter, with both incurring expenses, and sharing in the risk.
Advantages of a Cash Lease Agreement
- Landowner can be insulated from the volatility of running a farm
- Farmers keep the extra profits from big crops
- Lowers investments requirements for new farmers
Disadvantages of a Cash Lease Agreement
- An unmoving rental agreement can be hard on farmers going through a rough year
- Landowners cannot take advantage of tax programs designated for farmers
- Short-term leases can be a cause of instability in an already unstable industry
- Short-term leases can encourage unsustainable farming practices in tenants
In contrast, a crop share involves the landowner in the process of farming, including marketing, equipment acquisition, and even crop choice.
Instead of a simple price per acre agreement, the farmer and landowner enter an agreement where they share costs and revenue from the land. In this agreement, the landowner gives his land, and the farmer his work. Together, they share both cost and profit – everything from fertiliser, to the revenue from selling the crop. Depending on the agreement, the revenue share might be anywhere from 35/65 to 50/50.
This means the landowner can legitimately claim to be farming, giving them access to any program which farmers are entitled to.
Advantages of a Crop Share Agreement
- Landowners are essentially farmers, and can access many helpful programs and tax advantages for farmers
- Risk is shared between both parties
- More effective decisions as thoughts are shared between both an experienced landlord and tenant
- Easier for tax management and for shifting expenses, as partners can time their sale of crops
- Because the landlord is sharing costs, the tenant will have less operating capital tied up than with cash rent.
Disadvantages of a Crop Share Agreement
- Accounting for shared expenses creates more time, effort, and expense
- Income varies with yield as well as floating prices, and any changes in shared production input costs.
- Parties may need to discuss annual cropping practices, making unified management decisions more often than with a cash rent agreement
- Both farmer and landowner should frequently review/change the sharing agreements to ensure they’re still ideal for both parties as price or technology changes
Cash Lease or Crop Share: Which Option Fits Your Needs?
Life rarely works in black and white. When deciding between crop share or land lease deals when expanding your farm, you need to understand what’s best for you, and be able to negotiate with a landowner who wants what’s best for him. While this makes navigation more difficult, garnering a reasonable amount of trust, forethought, and some good counsel will help to clarify what the best option is for every person involved. The government of Alberta publishes a guide, called ‘Leasing Cropland in Alberta’, that may help you make the decision that’s best for you.
If you want more help, Alger Zadeiks Shapiro LLP can help navigate the cash lease/crop share world, and ensure your lease agreement works for you, and your partner. Call us to schedule an appointment today.
Frequently Asked Questions
*When entering into any kind of joint business venture, be sure to get a written agreement drawn up by a lawyer to ensure proper communication between all parties involved, as well as safety from any possible legal implications down the road.
Q: How does crop sharing (or sharecropping) work?
A: The landowner leases their land out to a farmer, but instead of rent, the landowner receives part of the farmer’s profit after that crop is sold. Because they both share profits, both landowner and farmer are involved in decisions, including choosing the crop.
Q: Is it better for a landowner to cash rent or crop share?
A: It depends. Each carries its own set of pros and cons, and is entirely dependent on what is best for each farmer and landowner. We encourage you to sit down with your business partner, and a lawyer, so you can discuss which option is best for you.
Q: Is it possible to have a hybrid agreement?
A: Yes. Lawyers can help both farmers and landowners draw up their own hybrid agreement.
Q: What problems are associated with tenant farming and sharecropping?
A: Business relationships are tricky, and a bad one can make your livelihood more difficult. Make sure you understand the liabilities of the joint venture you’re signing up for with the advising of a lawyer. Both cash lease (tenant farming) and sharecropping have seperate pros and cons, listed above.
Q: How do I determine the cash lease amount for my piece of land?
A: It depends on the productivity differences on that piece of land. One area may grow more canola than you can keep up with, and an adjoining section may have trouble producing a decent crop of corn.