Leasing Overview from Farm Table

Farm Table - Airlie Trescowthick

Type: Article
Knowledge level: Introductory

Farm Table says:

A summary of our blog articles on farm leasing.

Leasing: Part 1 

Four reasons farmers are leasing rather than buying

This week on the Farm Table we are exploring the topic of leasing farmland.

To begin, we explore five reasons why farmers may choose to lease land, rather than owning land.

Leasing land in Australia has been a proven and popular model for farmers to gain access to increased tracts of land, without having the huge capital outlay. However, leasing of farmland in Australia is an under-utilised form of land tenure when compared with the high rates of leasing in England and Wales; and in the USA (Agrifutures, 2011). In these countries, leasing accounts for between 40 and 60 percent of farmland (Duncan Ashby, 2016).

Why is leasing an attractive model?

  1. Expand your business without the huge upfront capital cost of buying land

Operators may not be in a position to accumulate farmland of their own and/or they can meet their farming goals without having to own the land on which they are operating. Leasing may also free up additional capital to spread your risk portfolio over other off-farm investments.

  1. Enables you to better match your resources to land under operation

Leasing enables a reduction in costs per hectare as fixed costs are spread over a larger productive land area. This includes equipment, machinery and labour costs. Increasing scale enables farmers to therefore achieve greater levels of efficiency in their business, as although overheads may increase, the overall cost of production should decrease.

  1. Enables a form of income for the landowner

For the lessor, a lease can provide a steady parcel of cash for land that is either unused or underutilised (whether that be because of stage of life, personal reasons or change in business focus).

  1. Transition tool for older and younger farmers

Leasing can enable an existing landowner to scale back operations, while giving someone else the opportunity to scale theirs up. This may be part of the succession planning process within a family or involve an unrelated party.

Leasing therefore can be a solution that benefits both the retiring and the entering generation. As noted by Duncan Ashby“Retiring farmers can retain the farmland, remain in their homes, and generate an income. Planning is required for the retiring farmer to determine how this plan will develop and how much income they will require. The release of additional lease land onto the market then creates opportunities for young or new farmers to establish farm businesses or existing farmers to expand.”

Other advantages (and disadvantages) for the landowner and tenant are explored in the table below.

Table 1 Advantages and Disadvantages of Leasing Land (Original source: Hudson Facilitation, GRDC, 2014).

Advantages Risks/Disadvantages
Lessor (landowner)
  1. no climate/production risk
  2. reliable income/cash flow
  3. opportunity for capital gain
  4. no working capital required
  5. little/no labour input required
  6. no market risk
  7. may continue living on the farm
  8. opportunity to do other things
  1. maintenance risk (soil health, weeds, infrastructure)
  2. little/no say in decision making
  3. reliant on financial viability of lessee
  4. dispute with lessee
  5. may be more difficult to sell land

 

Lessee (tenant)
  1. viable means for business expansion without debt/land purchase
  2. economies of scale in operations
  3. reduced cost of production
  4. justifies purchase of more efficient equipment
  5. increased profitability
  6. more attractive to contractors
  1. no exposure to capital gain
  2. uncertainty of continuing access to land
  3. machinery may not be adequate to cover increased area
  4. may not gain long term benefits of investment in land productivity  (e.g. weed control, soil amelioration such as liming)
  5. exposed to full production & market risk
  6. dispute with owner

Part 2: Leasing

How much do I pay for lease country? Help me!

This week on the Farm Table we are exploring the topic of leasing farmland.

In our last post we explored four advantages of leasing farmland and today we delve deeper to explore the most common types of lease contracts and approaches to calculating a lease.

Types of leases

Some of the most common types of lease are fixed cash, flexible cash or share lease:

  1. fixed cash: the tenant pays a fixed amount of rent/hectare on a monthly, bi-annually or yearly basis
  2. flexible cash lease: this is a variation to the above and involves the final rental payment being tied to the actual yield and/or selling price of the commodity. This ties in the expense for the tenant to profitability and the landowner shares in the risk/return
  3. crop or livestock share lease: the landowner may supply some of the production inputs (e.g. Cropping: seed, labour, chemical, fertiliser or Livestock: equipment, feed costs) and then may receive a portion of the final crop or livestock income/weight gain

In determining what lease structure is right for you, these are some questions to consider from the landholder perspective (Minnesota Department of Agriculture):

  • How involved do I want to be in management decisions?
  • Am I willing to market crops or livestock myself?
  • Am I willing to contribute labor?
  • How much variability can I tolerate in the rental income?
  • How much record-keeping and accounting am I willing or able to provide to fulfill the lease agreement?
  • Is the agreement equitable for the tenant and myself?
  • How much do I want to interact with the tenant?
  • How can I ensure that my conservation goals are met?

Calculating a fair lease rate

Considering entering into a new lease or leasing out your current farmland but not sure how to establish a fair lease rate?  There are two key perspectives on calculating a fair lease rate.

  1. Rate of return method

This method is based on a percentage of land value and may not necessarily be tied to profitability. NSW DPI state that although there is no prescriptive method, but generally lease values are reasonably stable between 5–9% of land value. For example, if land is valued at $2,500/ha and the agreed rate is 6% of the land value, the rental payment would be $150/ha. Refer to this post by Farm Agribusiness Solutions to how this method can be applied for dryland farming, irrigated farming, and livestock production.

Arriving at a realistic market value will have to be agreed between the landowner and tenant and may be based on relevant recent land sales with comparable characteristics or through a valuation appraisal.

This approach has driven lease values up, which can be problematic for lessee profitability. As noted by Andrew Rice, agribusiness consultant with ORM at Parkes, told the Weekly Times, “ABARES Farm Surveys data over a 19-year period to 2013-14 shows land values have increased by 106 per cent, while farm income per hectare has only increased by 26 per cent.”

  1. Percentage of expected return

This approach is based on the expected return for the enterprise in question, calculated through the budgeting process. This may be based on a gross margin analysis or rate/unit of production (i.e. $/DSE). Rates of 25-30% of GM are often applied to calculate the lease payment per this approach.

For example, if your barley enterprise was forecast to have an enterprise gross margin of $500/ha and was leased at 25%, the lease rate would be $125/ha. If you were projecting a return of $25/dse with your cattle enterprise, the lease rate would be $6.25/DSE.

Farm Agribusiness Solutions provide an example that compares the rate of return and budgeting method here.

Some calculators/templates that may be of use in helping to determine a lease rate include:

Part 3: Leasing

A checklist for farm leasing

This week on the Farm Table we are exploring the topic of leasing farmland.

In our final post, we provide a simple checklist for farm leasing and a round up of some handy tools available to you.

Lease Checklist

  1. Pre-lease preparation

This includes assessing the property, doing a site inspection and due diligence. Refer to People in Dairy’s Farm Scorecard for Due Diligence for a handy template to assist in this process.

  1. Understand the taxation impacts of leasing

Leasing land has taxation impacts for both lessor and lessee. These include:

  • for the landowner: may no long be able to claim primary production tax advantages, may lose access to CGT and small business concessions
  • for the tenant: lease expenses are fulling tax deductible
  1. Prepare and formalise a lease agreement

As noted in GRDC’s Leasing and Share Farming Land Fact Sheet, “The faintest ink is better than the fondest memory’: Always document share farming and leasing agreements.” It is advised to always have a written agreement that is discussed, clarified and agreed by both the landholder and tenant.

The lease agreement includes details of the land to be leased, identification of the partners to agreement, term of agreements (and options if applicable), rent and rental period, landowner’s obligations, tenant obligations, conflict resolution process, any special conditions, property access, land stewardship expectation, insurance etc. Refer to the GRDC Factsheet for a handy checklist at to AgriFutures for a sample lease agreement.

And finally, a round-up of handy online resources to assist you in your leasing journey:

Leasing and Share Farming Land Fact Sheet (GRDC, 2014)

The fact sheet outlines the importance of preparing a budget, ensuring you can access sufficient working capital before entering into a lease agreement, understanding your tax implications, valuing the lease and having a written lease agreement. A useful leasing and share farming checklist provides a guide to understanding the details of the land, timing, financing and legal processes.

Leasing Dairy Assets Resource Pack (People in Dairy, 2016)

This comprehensive and user-friendly toolkit contains:

  1. Section 1: Leasing a dairy property (4 tools)
  1. Section 2: Leasing dairy cows (3 tools)

Successful land leasing in Australia (AgriFutures Australia, 2011)

This RIRDC report helps broadacre farmers make decisions concerning the leasing of land. The paper outlines the financial and environmental benefits of business expansion through leasing for both lessees and lessors. Huge document that covers leasing from start to finish. Includes some case studies, global learning and agreement examples.

For this and a whole range of leasing resources, please head over to the Farm Table library.

2017 - Australia - Farm Table - Airlie Trescowthick
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