A client has recently leased a small area of consolidated peat to his neighbour to dairy on for $2,150 per hectare + GST. There were no buildings, just new pasture and fences. The lease is for five years with right of renewal and that got me thinking.
Thankfully land leasing is heading towards commercial lease in style and return. For farmers that means longer term, well structured leases, good returns to all parties and expectations and reviews.
We talk of "economic rent". That is a fair return to the land owner and a rent that the tenant can reasonably afford.
I guess the tenant wants it as cheap as he can get to maximise his profit and the landlord also has the same drives.
The percentage leasing has highlighted low farm rent as well.
If you take 1,000 kg ms per ha at $8 payout, this equals $8,000 per annum per hectare and at 25% an indicative rent of $2,000/ha + GST. This 25% figure came about when rents were $1 per kg ms when the payout was $4 and that is not that long ago!
If you look at the debt servicing model then banks will say that 25 to 30% of your income can go to debt cost. They do have higher ratios however. Take the 1,000 kg/ha model: at $8 you get $2,000 and $2,400 per hectare respectively as an indicative rent.
In the distant dark ages in the 50s, 60s, and 70s Crown leases were at 5% of value. Take a dairy farm at $50,000 per hectare at 5%, this equals a $2,500 per hectare indicative rent.
The caveat on all this is if you are in a good area with good production at $1,200 kg ms per hectare the rent will be more. And the converse applies. Poorer land with lower production will show a lower rental and this is where percentage leasing really comes into its own.
The other reason that I think rents are too low is that I believe a higher rent may encourage farmers to retain their land because they can get a good return and keep it as a commercial venture. A good lease therefore may allow retention of the property for the next generation.
I was recently asked to calculate the percentage lease of dairy cheque where 70 hectares was part of a 200 hectare dairy business. After much thought and many calculations it came to 8% of gross cheque. The result was that everybody knew the deal and it is near flawless. It also resulted in a 60% increase in rent to the existing family as owners of the 70 hectares.
Now there are many and varied calculations for dairy farm leases. Sometimes it may be difficult to calculate a percentage lease because extra feed is bought in and there may be other issues on other land leased, but I am convinced the lease rate for dairy farm leases are well behind. Currently $1,500 per hectare seems to be about the base rate. My calculations indicate they should be more like $2,000 per hectare plus.
Looking at those numbers and an existing example with which I am involved ...
a) Fixed price lease 70 ha @ $1,500/ha = $105,000
b) Percentage leasing kg ms 70 ha @ 1,000/ha x $8 x 25% = $2,000/ha
and a gross rent of $140,000
An improvement could see a change in attitude to land retention and more commercial type leasing in the industry. For farming there are huge benefits to all parties to get the rent up and correct.
I feel that correct farm leasing at better and more realistic rents may see better retention of land assets within families which is important for our future. What better investment can a retiring farmer have than his own farm rented to a good Lessee? This also means a good landlord will allow career lessees an opportunity to happily farm with a long term view because they may not be able to afford to buy their own farm at current values.
For further information on this percentage leasing concept please click Philosophy No. 408: Percentage Leasing.
Thankfully land leasing is heading towards commercial lease in style and return. For farmers that means longer term, well structured leases, good returns to all parties and expectations and reviews.
We talk of "economic rent". That is a fair return to the land owner and a rent that the tenant can reasonably afford.
I guess the tenant wants it as cheap as he can get to maximise his profit and the landlord also has the same drives.
The percentage leasing has highlighted low farm rent as well.
If you take 1,000 kg ms per ha at $8 payout, this equals $8,000 per annum per hectare and at 25% an indicative rent of $2,000/ha + GST. This 25% figure came about when rents were $1 per kg ms when the payout was $4 and that is not that long ago!
If you look at the debt servicing model then banks will say that 25 to 30% of your income can go to debt cost. They do have higher ratios however. Take the 1,000 kg/ha model: at $8 you get $2,000 and $2,400 per hectare respectively as an indicative rent.
In the distant dark ages in the 50s, 60s, and 70s Crown leases were at 5% of value. Take a dairy farm at $50,000 per hectare at 5%, this equals a $2,500 per hectare indicative rent.
The caveat on all this is if you are in a good area with good production at $1,200 kg ms per hectare the rent will be more. And the converse applies. Poorer land with lower production will show a lower rental and this is where percentage leasing really comes into its own.
The other reason that I think rents are too low is that I believe a higher rent may encourage farmers to retain their land because they can get a good return and keep it as a commercial venture. A good lease therefore may allow retention of the property for the next generation.
I was recently asked to calculate the percentage lease of dairy cheque where 70 hectares was part of a 200 hectare dairy business. After much thought and many calculations it came to 8% of gross cheque. The result was that everybody knew the deal and it is near flawless. It also resulted in a 60% increase in rent to the existing family as owners of the 70 hectares.
Now there are many and varied calculations for dairy farm leases. Sometimes it may be difficult to calculate a percentage lease because extra feed is bought in and there may be other issues on other land leased, but I am convinced the lease rate for dairy farm leases are well behind. Currently $1,500 per hectare seems to be about the base rate. My calculations indicate they should be more like $2,000 per hectare plus.
Looking at those numbers and an existing example with which I am involved ...
a) Fixed price lease 70 ha @ $1,500/ha = $105,000
b) Percentage leasing kg ms 70 ha @ 1,000/ha x $8 x 25% = $2,000/ha
and a gross rent of $140,000
SUMMARY
Considering the above calculations, farm rentals appear to be below what they should be.An improvement could see a change in attitude to land retention and more commercial type leasing in the industry. For farming there are huge benefits to all parties to get the rent up and correct.
I feel that correct farm leasing at better and more realistic rents may see better retention of land assets within families which is important for our future. What better investment can a retiring farmer have than his own farm rented to a good Lessee? This also means a good landlord will allow career lessees an opportunity to happily farm with a long term view because they may not be able to afford to buy their own farm at current values.
For further information on this percentage leasing concept please click Philosophy No. 408: Percentage Leasing.
