Livestock Agistment versus Leasing

Livestock Agistment

Agistment is the leasing of land for grazing. Typically the owner of a property allows another person to graze animals on their land for a fee. The movement of livestock between properties is common especially when neighbouring land has an abundance of feed or water.

Leasing is the fee a livestock owner will pay to another landholder for the right to graze a defined number of livestock on the property for a defined period. It can be an option for young farmers to consider as entry strategy when there is not sufficient capital to buy property. It is also used when feed demand outstrips feed supply during dry times or when you are growing your herd at a faster rate than your land base can carry.

Why you might consider agistment?

Feed demand outstrips feed supply

Agistment can be a very popular option for producers grappling with dry periods and drought. Rather than hand feeding stock, producers can retain their stock by agisting them on country with more feed on offer. Agistment can also be a great strategy when you are growing your herd at a faster rate then your land or feed base can carry.

Starting out

New farmers can consider agistment as an entry strategy when starting out when they do not have sufficient capital to buy property. It provides an alternative to leasing country.

Key Agistment terminology

Agistment

A right to graze your livestock on another person’s land under licence whereby you pay a specified rate for this access. The owner taking on the agisted stock retains possession of the land whereas in a lease the owner generally allows the tenant to exclusively possess the land.

An agistment period is usually short-term and agreements can differ particularly in regards to care and management.

Agistment Agreement

An agistment agreement is a verbal or written agreement between a landowner and an owner of livestock which sets out the terms whereby the livestock can be grazed on the landowner’s land.

Opportunity cost

The amount of income that would be earned if that resource was put to an alternative use (e.g. if you own a piece of land and decide to agist it out, the opportunity cost – income foregone – is if you ran your own livestock on those hectares).

Due diligence

Research, investigation or examination (homework!) performed before entering into an agreement. In regards to agistment, it is important to carefully assess the opportunity (the land, the land owner etc.) and your own resources (labour, cashflow etc.) before moving forward.

Breakeven period

An economic decision in assessing whether the agistment decision is a good one. It calculates the breakeven period for the cost of agistment compared to the cost of hand feeding at home. This approach is only relevant if you own land yourself.

Licensee/Grazier

The party with the agistment land available (the property owner)

Farm Leasing

Leasing land can provide a way to expand your farm business operation and increase economies of scale without investing in land, which can be cost prohibitive, particularly for young farmers.

A lease is where the tenant/lessee pays an annual fee (that may be fixed or indexed to inflation) for the use of the lessor’s land for a prescribed period (normally 3-5 years).

Why might you consider leasing?

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

• You may be looking to grow your operational business but not increase your land base.

• It may free up additional capital to spread over other investments (i.e. off-farm investments).

• You may have excess machinery, labour and equipment and by leasing additional land you use this more efficiently. Better match your resources to the land under your operation!

• Enables a reduction in your cost of production as fixed costs are spread over a larger productive land area. This leads to greater efficiency in your business and economies of scale, as although variable costs may increase, the overall cost of production should decrease as fixed costs decline as a proportion of income.

Legal Advice

Solicitors assist lessors and lessees separately to negotiate and draft the terms of the lease. Legal advisers are generally engaged once the parties have met, inspected the property and come to an agreement on some of the essential terms such as the lease rate and payment of outgoings (e.g. council rates and the area of land to be used).

In many cases a simple lease with the bare essential terms may be sufficient until something goes wrong, or a dispute arises. Then it can become awkward to work out a resolution while each party deals with the issue from their own perspective and tries to cover their own best interest.

It is common for people to rush and draft an insufficient lease, which later has its deficiencies exposed. In many cases problems arise because one party breaches an essential term of the lease, for example, by not paying the rent or not using the land as agreed, which can present difficulty if the lease does not sufficiently prescribe how the parties are to deal with such an issue in the lease properly.

Unfortunately, this can lead to one party acting to protect their own interests and in doing so exploiting the interests of the other, which may not always be intentional but can come about due to the awkwardness of dealing with a difficult issue.

Taxation

Benefits as lessee (tenant):

• viable means for business expansion without debt/land purchase
• economies of scale in operations
• reduced cost of production
• climate variability
• justifies purchase of more efficient equipment
• increased profitability

Issues as lessee:

• no exposure to capital gain
• payment of lease cost regardless of season (production 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

Benefits as a 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

Issues as lessor:

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

Please seek legal advice before you enter into any contract or agreement regarding either agistment or leasing of farm land.