Four Reasons Farmers are Leasing Rather than Buying

Leasing: Part 1 

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 per cent of farmland (Duncan Ashby, 2016).

Why is it 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 farm land, remain in their homes, and generate and 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

In our next post we look at the most common types of lease contracts.

Have you had experience leasing land as a tenant or landowner? Have any tips for those new to the business model?

Please share in the comments below.