IT IS traditionally seen as the poor cousin of buying land, but the director of a regional agricultural consultancy firm believes leasing farmland can be a useful financial strategy, especially in an era where high land values mean buying is often out of reach.
John Francis, of Wagga Wagga based Holmes Sackett, said leasing could be used in a variety of ways.
“It can be a great way of creating economies of scale to get the most out of your equipment,” Mr Francis told the Innovation Generation conference in Wagga last week.
However, he said probably the major use of leasing was for people starting in the industry, with low capital bases, to build their equity.
“Leasing can be used as a stepping stone to land ownership which is where the real wealth creation in agriculture is.”
While leasing is viewed by some as a high risk, low return strategy due to the fact the farmer leasing takes on all the climate risk while the land owner gets paid regardless Mr Francis offered up some case studies in the livestock industry where leasing had allowed operators to rise from beginning in agriculture to managing $12 million of assets.
He said while the farmers in the case study had varying business models there were some similarities.
Firstly, he said they had retained an off-farm job.
“Valuing that off-farm income was important it made the business more resilient and more able to withstand pressure,” he said.
Secondly, he said they started small and built themselves up.
“By starting small you can prove to yourself that the model you have in place works and if there are any issues such as a poor year beyond your control you are not wiped out.”
Overall, he said in order to make the most of leasing farmers had to be crystal clear about their objectives.
“Decision making is the key, while financial literacy is also critical, it is not enough to get into leasing because of a passion for agriculture you need to be in it out of a desire for wealth creation in agriculture.”
In choosing leasing ground Mr Francis said the factors could be slightly different to when looking to buy ground.
“In buying ground it is best to seek value, look for ground in an area that there might some problems with that you can solve, creating opportunities that way.
“With leasing ground it can be a more short-term thing so you have to factor all that into the decision making process.”
He said farmers should not be afraid to make improvements to leased farmland just because it may drive the land value up, which would be detrimental either when the lease was renegotiated or if the land came up for sale.
“If you make improvements that make you more money, then that is what you should do, concentrate on your own enterprise and not other factors.”
Mr Francis said there was a myriad of areas where farmers could spend money when leasing ground, but said getting stocking rates right and improving soil fertility were the two areas proven to be the biggest boost to the bottom line.
“If you had unlimited funds you’d look at all the areas such as scanning for twins and singles or pasture renovation but if you can only spend in one area then soil fertility is the best in terms of return on investment.”
“Knowing that ROI regarding profit drivers is critical if you are limited for capital.”