New lease of life rises for farmers trying to expand

Rabobank tips farm leasing surge as landowners stay slow to sell

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Rising land prices and fewer properties for sale are encouraging more farmers to lease instead, so they can expand or diversify their farm enterprise.

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Farmers are scaling up their traditional sharefarming ambitions, choosing full farm lease options instead, as they seek to expand their production bases without buying extra land.

Surging farmland prices and fewer properties for sale have coincided with more farmers wanting to diversify their enterprise risks across different geographies and weather zones.

Leasing's rising popularity in the past five years has been complemented by farmland investors lured to agriculture's solid capital growth gains, and retiring farmers looking for tenants to take over the property so the owners don't have to sell out.

Leasing offers a steady income return on their land investment without having to work the holding themselves.

Sharefarming is still very much a goer for some people, but I think we'll see the move to cash leasing arrangements gaining momentum - Wes Lefroy, Rabobank

Research by Rabobank suggests 28 per cent of active Australian farmers lease at least part of the land they operate.

Last year about 11pc of those tenants increased their lease holding area.

"Sharefarming is still very much a goer for some people, but I think we'll see the move to cash leasing arrangements gaining momentum, because of its simplicity for tenants and landlords," said agricultural analyst, Wes Lefroy.

Unlike sharefarming, where the landowner generally relied on some of production profits as part of the deal, leasing also avoided the risk of income volatility if seasons turned bad or commodity prices slipped.

According to Rabobank, close to half all South Australian farmers leased at least some of the land they operated, while 38pc of West Australian farmers did the same.

Both states had big farming enterprises operating in grain production, or big pastoral ventures, where leasing could bolster a farmer's economies of scale relatively easily.

NSW had just 17pc of farmers leasing extra land, most likely because the state had many small livestock operations, which tended to be more costly to upscale compared to cropping or larger pastoral ventures.

We have seen families which had looked at exiting farming turn to leasing their land rather than selling up - Wes Lefroy

Rabobank found the incentives for leasing agricultural land were generally becoming more compelling for many reasons, particularly opportunities to "unlock scale" in an environment where fewer properties were available to buy.

A farmland listing shortage

Stronger farm commodity prices and drought had combined to cut the number of farms listed for sale by nearly 50pc between 2014 and 2018.

That shortage of buying options had subsequently prompted more producers to consider leasing land as an alternative expansion strategy, either temporarily, or as a permanent move.

This allowed them to divert more capital into building livestock numbers, improving farm infrastructure, or buying extra machinery.

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For both landlords and tenants, Mr Lefroy said leasing also offered flexible succession planning pathways for farm families.

"We have certainly seen families which had looked at exiting farming turn to leasing their land rather than selling up," he said.

In some cases the lessee might be a next generation family member, possibly enjoying a discounted rent rate.

Leasing motivation

"Over the next two years, we see the motivation for both current and prospective tenants and landlords to lease becoming even stronger," Mr Lefroy said.

"Agricultural land is becoming more attractive as an investment class.

"We expect capital appreciation of ag land to remain healthy across many regions in Australia in the next three years.

Wes Lefroy

Wes Lefroy

"It is also not as volatile as a number of other assets, which is valued by investors."

Farmland rents were typically about 5pc of a property's value, with higher rates reflecting more infrastructure and maintenance activity by the landlord.

Investor interest rises

Corporate players, including overseas investors and real estate investment trusts were already more active as farmland owners and lessors, but corporate activity in agriculture had not yet been a significant driver in the leasing trend.

"The majority of interest, on both sides, has been from family farmers," he said.

Leasing would likely continue to be more common among larger farming operators and in the cropping sector, however, Mr Lefroy felt all farmers should consider the value in leasing land as part of their expansion strategies.

With the growing focus on managing climate volatility, we expect an increasing number of farmers will employ leasing of land as a means to mitigate prominent weather risks, such as frost and drought - Wes Lefroy

He said leasing also provided an option for farmers to adopt non-traditional business models, such as sale and lease-back or equity partnerships.

In many cases a business partner may be buying land specifically to lease it back to the farming enterprise.

Leasing was enabling farmers to expand without taking on debt for land purchases, and also by helping them spread weather risks on profits by diversifying where they farmed.

"With the growing focus on managing climate volatility, we expect an increasing number of farmers will employ leasing of land as a means to mitigate prominent weather risks, such as frost and drought," Mr Lefroy said.

Not always perfect

However, the suitability of leasing rather than buying was not for all, and it varied depending on farm production and individual circumstances.

"Some businesses value the long term security of a land purchase, which enables farmers to invest in the land, for the long term, with soil management and fencing projects, without the risk of losing the lease.

"Some farmers prefer a sharefarming arrangement because it can offer tax benefits."

Also important to consider was the complex movement in land lease prices because there was insufficient transparent data and the way prices were set often varied.

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