Tight market drives alternative options

Tight market drives alternative options

Property
Aa

"It doesn't make any sense to take on more farmland if you're not a good farmer."

Aa

WITH farmland values having increased, yet interest rates being historically low, deciding on the best way forward for farm expansion can be a fine balance.

High land prices means farmers need to have significant capital behind them to purchase, whereas leasing provides a lower upfront cost option.

However in most instances with the current market, the low interest rates make purchasing property a more cost effective choice in the long run, for those who can afford it.

This dilemma has also likely prompted farmers to further optimise their already owned farmland, which has been aided with advancements in farm technology and science.

Planfarm director Cameron Weeks said when advising farmers on the best way forward for an effective investment, it's advisable to always look within the business first.

"I advise people to always get the most from what they are currently farming - optimise that and improve the soils, improve the management," Mr Weeks said.

"It doesn't make any sense to take on more farmland if you're not a good farmer.

"A dairy consultant from Tasmania once said he has never seen a poor farmer farm their way out of trouble and it makes really good sense, but if you are good at what you do, then replicate it."

He said such a situation was looked upon on an individual basis, taking into account the farm's financial situation, the owner's goals and preferences, the current property market etc.

As farmland values have grown rapidly in the past few years, Mr Weeks said he had noticed an increased appetite for leasing.

"For anyone wanting to grow their business then a purchase, if not out of reach, can be quite risky for them because of the sheer scale of a purchase for a small to medium-sized business," he said.

"But this is then countered by the very low interest rates (on purchases) as the lease can be more expensive than interest, however it might be more affordable as when land values in some parts of the State are very high, then it can be almost impossible for some people to buy."

With farmers' appetite for expansion high (20 per cent of WA growers plan to increase their farm investments, based on Rabobank's recent confidence survey), Mr Weeks said he had seen a trend towards growers seeking to optimise their existing farmland.

He said the focus has been on sandier soils, using soil amelioration techniques to address issues such as non-wetting soils, subsoil acidity, sub-soil compaction, as well as lots of lime application.

"If you have the capital to do it, it is a proven return and I don't think people are so focused on whether it will work or not because it just works, you just need to be prepared to commit to it, although this year highlights some of the erosion risks which are associated with some of those improvements on sand," he said.

In February research from Rabobank found that leasing land was expected to become increasingly common in the Australian rural sector and 38pc of WA growers had leased land as part of their operation.

Report author and agricultural analyst Wes Lefroy said there were three factors which contributed to the demand for leasing.

Limited properties being available for purchase, which is expected to remain low, was a key reason, as leasing still provided producers an option to expand.

"Leasing also supports diversification of farm business models, so we have seen several corporate and family farm entities employing non-traditional business models, such as sale-and-leaseback or equity partnerships, which can at times help businesses direct capital towards assets, such as infrastructure," Mr Lefroy said.

"Another factor that was an important consideration is that leasing can help to mitigate against weather risks, so for example, leasing in another region.

"The third key fundamental was that more landlords have turned to leasing rather than selling.

"So we are seeing more people keeping the farm as an asset class and then leasing it out," he said.

"We have also seen an increased number of farmers using leasing as a vehicle for succession planning, so rather than making the son or daughter purchase the property or handing it to them, parents can use leasing as a vehicle to facilitate that transfer between generations, so whether farmers are looking to lease land or own the land and are looking to lease it out, there are factors that favour either side."

The story Tight market drives alternative options first appeared on Farm Weekly.

Aa

From the front page

Sponsored by