Renting vs. owning farmland: How to decide for successful farming

As farmland values continue to rise, you face a crucial decision –– invest in land ownership or farm on rented land. This choice impacts your farm’s long-term strategy, profitability, and growth. There isn’t a clear cut answer. It’s essential to understand the pros and cons of each option to make the best decision for your operation.

The cost of land ownership

Owning land has long been seen as a mark of successful farming. It offers control, stability, and the security of knowing your land won’t change hands. However, as land prices climb, the financial challenges of land ownership become more evident.

Accessibility vs. ownership

In today’s agriculture landscape, land accessibility can sometimes be more valuable than ownership. Renting farmland offers flexibility, allowing farmers to direct their financial resources towards operations that directly enhance profitability, like improving soil quality, purchasing machinery, or crop diversification.

Long-term leases can provide the stability and security that ag producers seek. A multi-year lease can offer control over the land and confidence in investing in sustainable farming practices, similar to what land ownership provides. A 30-year lease for example, gives farmers the peace of mind needed to plan for the future without the burden of a mortgage.

Treating land ownership and farming as separate businesses

Wealth generated from rising land values may lead to complacency, causing you to lose sight of maximizing operational profits. Producers should separate these two aspects of their business to better understand where their profits are coming from and avoid confusing land value growth with farming success.

Strategic debt and investment decisions

Managing debt is a key factor in deciding whether to buy or rent farmland. You need to assess your comfort level with debt and develop a long-term strategy for managing your finances. If land ownership is the priority, you must be prepared for the high upfront costs and the impact on cash flow. In contrast, renting can free up capital for investments that directly contributes to successful farming.

Its also important to consider the long-term impact of debt. Higher debt levels can limit flexibility, especially during market downturns or unexpected challenges. A sound plan includes regular reviews of the farm’s financial health, allowing you to adjust strategies as market conditions change. Being proactive ensures investments –– whether in land, equipment or technology –– align with farm’s goals.

If you’re a new or small-scale farmer, farming on rented land may be a practical option. Renting allows you to invest limited capital into other areas that produce immediate return. This approach can make farming more profitable in the short term and set them up for future growth.

The future: Renting as the new normal?

Given the rising cost of land and changes in intergenerational wealth transfers, renting is becoming more common. You may find that owning all the land you farm is less feasible. This shift emphasizes the importance of building strong relationships with landlords and negotiating favourable long-term lease agreements. In the future, success in farming may depend not just on land ownership but on the ability to manage rented land effectively as part of a broader operational strategy.

Key takeaways for producers

The decision to buy or rent land depends on various factors, including financial capacity, comfort with debt, long term vision, and operational opportunities. Regardless of the choice, the focus should always be on maximizing operational profitability.

Farming on rented land can offer flexibility, allowing farmers to allocate resources where they are most needed and avoid the burden of large debt payments. Meanwhile, land ownership provides control and sustainability but requires careful financial planning and a clear distinction between land value and farming profits by separating these two businesses aspects and aligning decisions with their long-term goals, farmers can position themselves for success.