COMPARING OPTIONS IN CROP SHARING

Originally published on May 2, 2002

 

The crop share lease has been around for a long time.

In this arrangement the landlord provides the land and pays for a portion of some predetermined inputs in exchange for a share of the harvested crop.

The renter provides the labour, machinery and the major portion of the operating expenses in exchange for a share of the harvested crop. Typically, seed, chemicals and fertilizer are examples of the predetermined inputs that are shared in the same proportion as the crop.

According to Morley Ayers, a farm management agrologist in Saskatoon, there are two crop share lease arrangements that are most common.

The first is a hybrid of the old 2⁄3-1⁄3 crop share in which the renter gets 66 percent of the crop and the landlord gets 33 percent. The modification to this lease is that the landlord now agrees to pay for 1⁄3 of the seed, chemicals and fertilizer costs that were used to grow the crop.

The second lease type is based on a 75-25 renter-landlord split. Under this crop share lease, the landowner pays none of the input costs.

Trust is the biggest component of any crop share lease. An invoice to the landlord for a share of the fertilizer and chemicals will not be paid if the landlord doesn't believe that all of the inputs were actually applied. For some, this is resolved by using the 75-25 renter-landlord split with no sharing of the input costs.

The top table looks at the actual gross profit returns for each of these crop share alternatives. The example is based on two quarter-sections farmed on a crop share basis in 2002.

Let's assume the crops are canola and peas. There are three hypothetical results.

First, we could assume an average production year. If you are the landlord, then the 75-25 percent split is the way to go. This puts almost four percent more money in your pocket.

The second scenario involves a below-average year. This assumes a canola harvest of 15 bushels an acre with peas running a paltry 20 bu. an acre. If this occurs and you are the landlord, then the 75-25 percent split again wins.  You will manage to put slightly more in your pocket than with the two-thirds, one-third split where the renter loses ground due to the amount he alone paid on seed, chemicals and fertilizer.

 

 

Only in the third scenario does the 2⁄3-1⁄3 split work better for the landlord. If an above-average crop is harvested, then the 2⁄3-1⁄3 split beats the 75-25 percent alternative by almost eight percent. Being optimists, on our farm we are going for the 2⁄3-1⁄3 split with shared inputs.

          

Regardless of which crop share lease you choose, put it in writing. This avoids the failed memories and the "I thought we were doing this" flashback.

 

Allyn Tastad, certified general accountant, is a partner in the accounting firm of Hounjet Tastad Harpham in Saskatoon at 306-653-5100, e-mail at allyn@hth-accountants.ca or website www.hth-accountants.ca. He is also involved in the family farm near Loreburn, Saskatchewan.  The opinions expressed in this column are for information only.