Property leasing offers a viable solution for expanding your farming operation and achieving economies of scale without the hefty investment in land, which can be particularly challenging for young farmers. By entering into a lease agreement, you pay a predetermined fee to utilise the lessor’s land for a specified period, typically ranging from 3 to 5 years. This arrangement not only helps overcome cost barriers but also facilitates the sustainable growth of your agricultural enterprise.

Key Terms

Lessee

The tenant

Lessor

The landowner

Lease agreement

A lease agreement is typically created to outline important details such as the names of tenants, property description, tenancy term, lease payment amount, responsibility for fixtures repairs and maintenance, and the lessor’s right to access the property. This ensures clarity and understanding between both parties involved in the lease.

Economies of scale

Cost advantages that enterprises obtain due to their scale of operation, typically measured by the amount of output produced per unit of time. A decrease in cost per unit of output enables an increase in scale. In this case, fixed costs are spread across more hectares.

Opportunity cost

The amount of income that would be earned if a resource was put to alternative use (e.g. if you own a piece of land and decide to lease it, the opportunity cost – income foregone – is if you had farmed the land instead yourself).

Why you might consider leasing

Grow your business without the burden of hefty upfront expenses associated with land acquisition.

If you’re aiming to expand your operational business without acquiring more land.

If you have surplus machinery, labor, and equipment, you can optimize their usage by leasing additional land. This allows you to better align your resources with the available land under your operation, ensuring efficient utilisation.

By spreading fixed costs over a larger productive land area, you can effectively reduce the cost of production. This results in improved business efficiency and economies of scale. While variable costs may increase, the overall cost of production should decrease as fixed costs become a smaller proportion of income.

Advantages of leasing land

For the lessee (tenant)

• viable means for business expansion without debt/land purchase
• economies of scale in operations
• reduces cost of production
• justifies purchase of more efficient equipment
• increases profitability

For the lessor (landowner)

• no climate/production risk
• reliable income/cash flow
• opportunity for capital gain
• no working capital required
• little/no labour input required
• no market risk
• may continue living on the farm

Disadvantages of leasing land

For the lessee (tenant)

• no exposure to capital gain
• payment of lease cost regardless of season (productio and market risk)
• uncertainty of continuing access to land
• machinery may not be adequate to cover increased area
• may not gain long term benefits of investment in land productivity (e.g. weed control, soil improvement)

For the lessor (landowner)

• maintenance risk (soil health, weeds, infrastructure)
• little/no say in decision making
• reliant on financial viability of lessee
• may involve dispute with lessee
• may be more difficult to sell land