Leasing land is one way farmers have been able to increase farming land, for new farmers to join the industry as others retire or look to down size, or for non-farmers to invest in farm land (without farming full-time).
A report developed by Agrifutures in 2011 titled ‘Successful Land Leasing in Australia’ explained that the number of farms has decreased from 138,654 in 1998 to 129,154 in 2004. The 2010-2011 census indicates that there were 135,000 farms.
One key barrier faced by young, new or expanding farmers is the cost of capital associated with purchasing. Leasing means that the outlay to purchase land is not required.
Leasing land provides land owners who are looking to down size or wind down their operation a means to effectively use the asset in the process.
By leasing the land they can continue to receive a steady income, but benefit from capital gains into the future.
Before going head first into leasing land there are some considerations that need to be made including environmental, sustainability and long-term stability.
Bendigo based agribusiness consultants ORM outline a list of do’s and don’ts regarding leasing land.
Do; have written agreements, conduct pre-agreement inspections, agree on land condition and improvements, have a management plan for the operation of the land, make allowances in the lease agreement for capital expenditure, conduct annual reviews and understand tax and insurance implications of leasing for both parties.
Some of the don’ts include determine lease values based on land values without considering the implications for profitability of farm business operations, make the agreement overly complex and time consuming to administer, make the agreement too simple and overlook agreement on the condition of the land and improvements at the conclusion of the agreement.
There are two methods that can be used when determining a lease value, but ultimately it will come down to the two parties negotiating a reasonable price.
Parties can use a percentage of the land value, for example land at $2,000/ha at 7% would be $140/ha.
The other method takes a percentage of the expected return and therefore a budget needs to be collated. The budget will give you an estimated gross margin, with a percentage of approximately 25-30% used to calculate lease value. For example, if the gross margin expected from the property is $400/ha at 29%, lease payments would be $116/ha.
Your local farm business adviser should be able to give you an indication of the leasing rates in your area.
While leasing may not be for everyone, it does provide another alternative option to farmers and perspective farmers, which can help with the continued improvement in the industry over time.
This article was published in the Stock and Land, 11 January.
