Consider the alternatives to buying or selling agricultural land

Liam Lenaghan - John Stuchbery & Associates - Birchip Cropping Group

Type: eBook
Knowledge level: Intermediate

Farm Table says:

Have you considered a flexible rain-based agreement lease? Learn more about the benefits here.

This eBook section states that given the large capital cost of buying land, it is important to acknowledge there are alternatives to consider.

At the time of writing (2006), leasing and share farming were the most commonly used alternatives, but still played a relatively minor role in the Australian landscape. They believed for wider adoption of non-ownership models two key issues need to be addressed:

  1. Education of investors in rural property that their returns will be affected by seasonal conditions
  2. The duration of lease and share farm agreements must be increased to a minimum of 5 years to allow a low-risk, profitable farm business plan to be executed.

The document outlines the typical characteristics of a lease arrangements and a share farm arrangement.

Table: Liam Lenaghan (John Stuchbery & Associates)

Leneghan notes that there are inequities and risks for both land owner and the lessee/share farmer that may potentially act as a barrier to wider adoption of tenant farming.

An alternative is a flexible rain-based lease arrangement that addresses these inequities.

Flexible rain-based agreement lease

This proposed concept involves the following:
  • The landowner accepts a proportion of the seasonal risk – a reality of making an investment in agriculture! This is a feature of current share farming agreements but not lease arrangements.
  • The grain grower accepts only a proportion of the seasonal risk!
  • The landowner has no exposure to the management risk. Exposure to the farmer’s management skill is a potential weakness of current share farm arrangements.
  • The grain grower accepts all the management risk. If the farmer has exceptional management skills why should the land owner derive monetary gain? The sharefarmer does not gain financial reward from any capital appreciation he creates in the land owner’s asset!
  • A floor and ceiling value should be negotiated to protect both parties in the event of an exceptional circumstance in weather.

An example is given based on growing season rainfall in Horsham.

Tables: Liam Lenaghan (John Stuchbery & Associates)

The author outlines the following benefits to each party:

To the grain grower:
  • The cost of land access is proportional to rainfall and the business’s ability to pay
  • Minimises the impact of poor seasons at the expense of the landowner – this is an opportunity cost to the landowner not a cash expense!
  • Shares the spoils in good seasons.
To the landowner:
  • The opportunity to capture additional profits in good seasons.
  • No working capital requirement.
  • No exposure to the grain grower’s management skill.
2006 - Australia - Liam Lenaghan - John Stuchbery & Associates - Birchip Cropping Group
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