Owning farmland is a key factor of success. It is after all, hard to farm without land outside of the greenhouse sector. Without continued access to farmland, a farm operation’s lifespan is perilous. There are only really two options for access to farmland, ownership and leasing. And one of those is currently more advantageous and permanent. Owning a farm is part of the dream for many. The keyword there is owning. I’ve spent some time investigating why ownership is so important. After all, for beginning farmers, the biggest hurdle is affording land.
The Only Drawback to Leases
Leases have their place in agriculture, they are a great vehicle for expansion. Roughly 38% of the land farmed in Canada is leased making leases a fairly common occurrence. Canada does not have a culture of long-term leases and tenancy which is where the perilous part comes in. In a lease, there is always a risk that the landlord will not renew the lease, therefore removing that land base from your production. Leases do offer an often more cost-effective option to a mortgage. Long-term leases would be a better choice financially for many farm operations, especially those in regions where land prices are north of $10,000 per acre.
Access to land through leasing is complicated and difficult as most leased land is not advertised as available. It is usually acquired through connections. And even if you find land for rent, if you reside in a competitive area dominated by large farms, getting outbid is a real risk. Landlords want to make sure they get paid so an established well-known farm is more likely to get the land than a new start-up farm.
Ownership – No Expiry Date?
Owning land on the other hand gives a farm business almost permanent control, nobody can cancel the lease on land you own unless there’s a situation where the government wants the land. This does still happen, especially in metropolitan areas. The government has no issue taking away farmland for industrial or other development. I suggest reading this article, the lie of the failed native farm, to remind yourself what kind of disastrous agricultural and land theft policies the Canadian government is capable of. Significant portions of Canada are after all on unceded First Nations land. If we want to discuss the benefits and incentives towards farmland ownership, land theft is still an issue today that needs to be acknowledged. The Dominion Lands Act plays a key role in land access historically. It can not be discussed without adding the Indigenous impacts.
There is a basis for owning land ingrained deep in all aspects of agriculture. Getting lending without owning sufficient collateral is really hard. And in agriculture, the preferred collateral security is farmland. Farmland has been appreciating at rates unparallel to most other investments for decades. That makes it a safe investment and safe security for the bank. It also helps that we have government loan guarantee programs like CALA that offer further security on farm mortgages. So part of owning land is access to credit as that ownership comes with equity.
The financing dilemma also extends to infrastructure investments. It’s a lot more comfortable to make infrastructure investments on land that your farm owns than on leased land. There is little incentive to upgrade or repair a barn if the length of your lease is uncertain. And back to financing, if you want to build a barn or a shop and need financing to make that happen, the bank is going to require you to own the land it will sit on.
History of tenant farms
Data on tenancy rates is fairly sparse for Canada prior to 1976. The estimates range from 25-50% of farmers being tenants in the first half of the 19th century using voter records. Looking at voter records is one way of estimating tenancy rates because only men who owned sufficient property were allowed to vote. In Huron County (today a very agriculturally dominated county in Ontario), only 308 voters were eligible out of a population of 6,000 people in 1841, suggesting the majority were tenants and labourers. One of the few bits of literature focusing on tenants estimates that tenants operated 16% of Ontario farms in 1871.
While the dataset from StatsCan only starts in 1976, the number of farms that do not own any farmland has been declining, dropping to a low of 3.8% of all farms by 2006. The overall number has steadily dropped from nearly 20,000 in 1981 to 8,500 in 2011. The appreciation of land values in the last decade likely contributed to the increase in tenant farms back up to 10,600 on the 2016 census. Tenant farms now make up roughly 5% of all farm businesses.
As mentioned with leases, tenant farmers’ main risk to their farming livelihood is eviction. The data on farmland tenancy shows that the vast majority of farms own some land (an average of 545 acres in 2016). It is possible that the decline in the number of farmers is related to a significant decline in sharecroppers and tenant farms. Owning land would then be a critical factor in staying on the land and farming long-term. From a historical Canadian perspective, tenant farmers have not survived in the long run.
Young Farmers and Land Ownership
Trying to find data on farm ownership also highlighted the age factor. Even in 1901, farmers between 60 and 69 years old owned most of the land. Less than 21% of farmers under 30 at that time in Ontario and the Maritimes. The number jumps to 50% for Western Canada as the Dominion Lands Act offered low-cost access to farmland. The Act gave a qualifying claimant 160 acres for a $10 administration fee. They could also buy additional quarter-sections for the same $10 fee once the original plot met the requirements of cultivating at least 40 acres of the land and build a house on it within three years.
The Act gave away 118 million acres of land by the time it ended in 1930. Currently, 158 million acres are being used for agricultural purposes. Today that kind of affordable land access still presents advantages. Descendants of the original claimants have the opportunity to inherit that land using beneficial tax policies. Inheritance is still relatively common and arguably an affordable way to obtain ownership. It does come with its own issues, as waiting on inheritance to start farming can mean waiting a long time.
With land ownership concentrated in the hands of the older generation, access for young farmers has been an issue for a long time. Young farmers in western Canada mainly owned significant acreages 100 years ago because of the Dominion Lands Act. When young farmers did own land in other parts of Canada, it was smaller acreages far below average. This situation is still true today, young farmers own a lot less land, and are far more likely to lease the majority of their land. Unless the land is free, cheap or inherited, a young farmer’s odds of owning land are not great whether it was 1901 or 2021.
Farm Survival Patterns
Acquiring land is hard. Buying land almost anywhere in Canada today will take at least $100,000. If you can make buying work, your odds of succeeding are not bad. Digging further into the statistics, farms have a pretty good survival rate as a business. The average 5-year rate is 72% compared to 66% for all businesses. The 10-year rate also still above averages, 52% compared to 46%. The outlier is the new entrant rate. Farming has a new entrant rate of 4.7% compared to 9.4% for all businesses. If a new farmer can get started, their survival odds are pretty good.
Farm bankruptcies are actually somewhat rare, at least in the last two decades. It is not 1980 anymore. Over the last two decades, annual farm bankruptcies filed ranged from 275 to 61 operations per year. Compared to all other businesses in Canada which have an insolvency rate of 0.9%, farms have a rate of 0.3%. Even if a farm is struggling to run its operations, land usually increases in value so selling portions is an option in a dire-straights kind of situation.
Mortgages are costly and do eat up a lot of available cash flow. This makes leasing an economically viable option. For comparison, we’ll compare a 200-acre farm, valued at $6,000 per acre, with a cash rental rate of $120 per acre (2% rate of return). If a 25-year lease was an option, the total cash expenditure would be $600,000. Total cash on a mortgage for that property (4%, 25 years, 20% down) would be $1,754,939. The cash expenditure is much higher to buy but the interest paid on that property (at current rates) would actually be lower ($554,939) compared to the rent.
Leasing in this example has a similar impact on the profit as the interest expense, the real difference is the cash outflow. The greater outflow turns into equity while leasing remains an expense. The above would be why a mixed land base of leased and owned acres is so common. Many larger farms do rent a significant amount of acres because financially the cash outflow works better. When land prices get over $10,000 per acre, the monthly mortgage payment is enormous even at historically low-interest rates.
While the number of acres leased is increasing, few farm operations don’t own any land at all. In total, 95% of farmers own some land. Owning that land gives them both business security (no evictions) and collateral security for financing. For now, unless there is a change in traditional banking offers, owning (some) land will continue to be a factor in the success of a farm business.
Leasing is difficult to sustain in the long term due to the double stress of possible eviction and poor access to financing. And as history shows, the real factor keeping young farmers out is money or lack thereof. This might change as land becomes more unaffordable and landlords might have to consider offering more favourable long-term tenancy options. These are already the norm in many European countries but here, owning and buying are still very dominant.