Leasing is a term used to describe a financial arrangement between two parties where one party ‘owns capital’ (the Lessor) and another party rents the capital from the owner (the Lessee).

 

Leases are applied to plant and equipment, land, water and livestock within the dairy industry.

Leasing may be an option for:

• Landowners looking to step back from active farming and generate an income without having to sell the property (Lessor)
  
• Investors who are mainly interested in capital growth of the land and receiving a reasonable rental for the asset (Leesor)
  
• Farmers who seek full control over their dairy business without borrowing heavily to purchase land. Dairy Operators can grow wealth while leasing a property and may use profits to increase equity in their dairy asset, expand their business or invest in non-farming assets (Lessee)

 

Leasing dairy assets resource pack

The Australian dairy industry has developed the Leasing Dairy Assets Resource Pack which contains information and tools for assessing and establishing a leasing agreement.

Each tool can be downloaded individually (see below).

Note: there are 2 sections within the resource pack and the final tool in each section has 3 documents.

 

Section 1: Leasing a dairy property (4 tools)

• Tool A: assess a range of factors and do due diligence using the Farm Scorecard
  
• Tool B: check the arrangement is fair & affordable with the Leasing Property calculator
  
• Tool C: use the Checklist for arranging a lease (Word) to discuss the key elements involved
  
• Tool D (3 docs): prepare a draft with the property lease agreement template – standard clauses
  To complete the template, you will need the Schedules and property information sheet.

 

Section 2: Leasing dairy cows (3 tools)

• Tool E: assess a range of factors and do due diligence using the Cows Scorecard
  
• Tool F: use the Checklist for arranging lease of dairy cows
  
• Tool G (3 docs): prepare a draft with the cow lease agreement template- standard clauses
  To complete the template: you will need the Schedules and cow information sheet, a guide to the standard clauses (agreement) and signposting.

 

A successful lease arrangement involves mutual respect and trust but should always be based on a written document which clearly states the expectations and the responsibilities of each party.

Dairy career paths and farm ownership

Like anyone involved in a business, the long term goal for dairy farmers is to grow assets and wealth during their time in the industry.

Traditionally, progress in the dairy industry has been focused on achieving the ultimate goal of farm ownership, as this has been seen as the best way to grow wealth. Entrants into the industry have generally spent time as an employee and/or experienced a period of share farming, during which there is growth in skills and assets, followed by a period of leasing, with a further increase in assets and skills and eventually dairy farm ownership.

Land and infrastructure contribute about 75% of the capital required to own a dairy business. For example, the land infrastructure for a 260 cow farm is likely to be worth about $1.8 million. Cows and mobile plant contribute the remaining 25% ($0.6 million).

For someone wanting to enter/progress in the industry the money required to buy a farm can be prohibitive, especially as land prices climb. They know they have the skills to operate a successful dairy business and generate a healthy business profit, but just can’t get into the game because of a lack of adequate funds.

However, this traditional approach is not the only way to achieve the desired result. Lack of farm ownership does not prevent successful wealth creation.

A more reachable financial target for someone moving along the dairy career path is to initially own all or part of the cows and mobile plant. Then the decision to own the remaining 75% of the capital required (the land) can be assessed in terms of such factors as the available funds to do so, the effect on the business bottom line in terms of debt repayment, or simply one’s personal feelings about land ownership and investing off farm to generate wealth.

For some, the next step will be to continue along the path towards farm ownership. Depending upon their equity position at farm purchase, when they borrow money at 8% to own the $16,000 per hectare land, they are renting money costing $1,280/ha per year ($518 per acre), but they will receive the gain in capital value of the land which could be 0 – 5% per year and are not at risk of losing the land on which they farm.

Other dairy farmers are not worried about not owning their ‘place of business’. They are comfortable to rent it. For example, at 4% of capital value for a farm worth $16,000/ha, the rental calculates to $642/ha ($260 per acre). They believe that they can achieve a far greater return than 4% by renting the land owner’s asset and investing the profits made from operating their dairy business in assets not connected to their business. However, they do not receive the capital growth in the land over time, and are at risk long term of losing the land on which they farm.

Neither is wrong or right; it is possible to grow significant assets in either way but the absolute requirement in all situations is to have a profitable operational dairy business – making money out of converting grass and supplements into milk

Stepping Stones provides information on the different career opportunities on a dairy farm – it includes farmer stories, tips and explores the pathways available to progress your dairy career.

Dairy operators (Lessees) may lease a property as a step in their career path towards farm ownership. Others may choose always to rent land to create wealth. Regardless of the long term goal, a major reason for individuals moving from share farming to leasing is to gain complete control and reward for their efforts. If they are good operators, they will also increase net returns and build wealth.