Agfarm Finance Newsletter – January – Lease vs Buy, The Age Old Argument

Reid Seaby, Agfarm Regional Manager WA

Around the grounds – January 2019

The BOM recently released their quarterly outlook which unfortunately is instilling little confidence in growers, particularly those on the East Coast who have just suffered through a very challenging season. As farmers begin budgets and look towards next season, they are rapidly realising the impact of the poor production year. This is being exaggerated by the outcomes of the banking royal commission. It is reportedly becoming more and more difficult to get funding and there have been significant time delays. Even those who have been eligible to apply for the government assistance loans have commented on the extensive paperwork and lengthy wait periods.

On a more positive note, the expectation of greater compliance and rigour from the industry has prompted growers to be proactive and engage with their financial provider/s earlier than they traditionally would. Another encouraging thing to come out of the elongated dry spell is the reduced need for chemical, with very few people experiencing a summer weed germination.

Lease vs Buy, The Age Old Argument

With famers seeking opportunities to scale up their operations, increase profitability, manage risk and support succession planning, they are forever looking for options to grow their land holdings to accommodate more cropping and more livestock. This has historically been achieved by purchasing land that is for sale but in recent times, leasing has become a more popular and economically viable option.

Leases provide the lessee with the benefit of accessing increased acreage, enabling them to achieve greater economies of scale without having to raise huge amounts of capital for the purchase, while also decreasing the magnitude of the overall commitment. Not only does it benefit the lessee, but it also allows the existing landowner to decrease the size of their operation or exit farming without parting ways with an income generating asset.

More recently, leasing land has become an increasingly popular business model for farmers to either get in to agriculture or to add to existing land holdings. Although the number of leases has increased in Australia it remains an underutilised option when compared with the high lease rates in places such as Canada, the UK and the United States where leasing can account for between 40 – 60% of farmland1.

What are the pros to consider?

1. The ability to expand your business’s output without the large capital outlay. Some farmers are not in a position financially to buy additional land, rather they acquire a lease property to enable them to increase the area of their farming operation. According to the Australian Farmland Values report produced by Rural Bank in 20172, the average annual median price growth for agricultural land was 6.6% over the past 20 years, making it more and more challenging for farmers to buy property. Leasing is a solution to this.

2. Succession – it can provide a transition for older and younger farmers. In some instances, older growers are looking to scale down their farming operation which gives other younger farmers the opportunity to increase the scale at which they operate. This is a common form of succession planning for families.

3. Economies of Scale. Increasing scale should generally mean farmers can achieve greater levels of efficiency because the fixed costs are spread over a larger area of land. Although some overheads will increase, the overall cost of production on a per hectare basis should decrease.

What are the cons to consider?

1. Flexibility of agreements. With leases being a less common form of land tenure, there are many ways agreements are structured, they seldom follow a standardised practice. The flexibility these agreements offer is often beneficial but can also cause a lot of angst amongst the interested parties. Without a properly prepared and formalised lease agreement that details the landowner’s and tenant’s obligations, the outcome has the potential to be messy.

2. Price and term of lease. The price and term of a lease can also be difficult to negotiate. A fair lease price is hard to determine with volatility in grain markets and input prices. Lease terms will often depend on individual circumstances. A longer lease term may not be in the interest of the lessee based on their own future planning, however a shorter lease term can often lead poor soil conservation as tenancies change.

With these pros and cons in mind, Agfarm have introduced lease payments as part of the Accelerate finance package. This means from the 2019/20 season and beyond, growers will be able to fund their lease through Accelerate which will further assist in managing cashflow. To be eligible, the payment must be for land on which the current season crop is grown, a formal and legally binding lease agreement must in place, and the payment will be made from Agfarm to the landowner on the Accelerate customer’s behalf. For further information on lease payments or any Accelerate related questions please contact your local Regional Manager.

1. Is Agriculture Land A Good Investment. Decisions On Farm Land Tenure: Buying, Leasing And The Alternatives. Duncan Ashby (RG Ashby & Co.). 10/3/2016.https://grdc.com.au/resources-and-publications/grdc-update-papers/tab-content/grdc-update-papers/2016/03/is-agricultural-land-a-good-investment
2. Australian Farmland Values 2017. Rural Bank. Published March 2018. Department of Agriculture and Water Resources 2018, Agricultural Lending Data 2016–17, Canberra, October. CC BY 4.0. https://www.ruralbank.com.au/assets/responsive/pdf/publications/afv-2017.pdf
 

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Reid Seaby WA Regional Manager | 0439 625 853

Kate Phillips SA Regional Manager | 0438 128 472

Anthony Hall QLD & NSW Regional Manager | 0400 873 777

James Ryssenbeek VIC Regional Manager | 0447 743 556

 

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