The agriculture sector will see more land leasing activity as farmers attempt to cope with the restriction in the amount of arable and grazing land available for purchase.
Agricultural bank Rabobank’s A New Lease on Land report reveals that the incentives for leasing agricultural land are becoming more compelling for both tenants and landlords.
“The incentives for Australian farmers to lease a share of their operated area are already strong,” Rabobank analyst Wes Lefroy said. “Over the next two years, we see the motivation for both current and prospective tenants and landlords to lease to become even stronger.”
The opportunity for expansion
The report reveals that leasing enables farmers to expand operations, either as an alternative to buying land or as a way to buy property in the future, as well as to provide purchasing opportunities. In addition, it provides an option for farmers to adopt non-traditional business models, such as sale and lease-back or equity partnerships.
“This can assist farm businesses to direct capital towards other assets, such as infrastructure, instead of land,” Lefroy said.
He also highlighted the way in which leasing can reduce risk, “…both by enabling farmers to expand without taking on debt for land purchase, and also by acting to mitigate the impact of weather on profit variability by diversifying the locations in which they farm. 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.”
More leasable land likely
The report predicts more agricultural land that will be available for lease, driven by improved investment returns and more farmers retiring from the industry.
“Agricultural land will become even more attractive as an investment class,” Lefroy said. “We expect capital appreciation of ag land to remain healthy across many regions in Australia over the next three years, while it is also not as volatile as a number of other assets, which is valued by investors.”
It is anticipated that extra land will become available this with more farmers opting out of the sector for lifestyle reasons and / or due to the effects of long-term drought.
“The option of leasing out land enables exiting farmers to achieve a lifestyle change while still waiting for the drought to break before selling, if at all,” Lefroy said.
Property prices not necessarily a factor
While the increase in farmers leasing land in Australia has occurred during a period of rising property prices history shows that leasing can also rise when property prices are falling.
“During the US farm crisis of the 1980s and subsequent drought, land prices in Iowa fell by more than 50 per cent in real terms from 1982 to 1987. During that five year period, the area of farmland under lease increased from 21 per cent to 27 per cent,” Lefroy said. “Where farmers did not have to sell to meet debt obligations, leasing rather than selling enabled Iowan farmland owners to achieve lifestyle changes and avoid selling in a low market.”
