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Rural Industries Research & Development Corporation
Summary of full report
June 2003
RIRDC Publication No 03/080 RIRDC Project No ASH-1A
Executive Summary
Aims
This book aims to identify the circumstances under which the leasing
of farm land represents a suitable form of business expansion. It also
seeks to identify how leased land can be managed in a sustainable manner
that is fair to both landowner and tenant.
It provides information on the circumstances under which the leasing of rural land represents an appropriate form of farm expansion. It covers leasing and other land tenure practices in Australia, USA, England and Wales, and defines sustainability in a leased situation. Economics, legal aspects and best practice are also examined. The information is provided together with practical examples, a major case study and several self directed exercises.
Economies of scale
The economies of scale of a viable business are often directly related
to the return on capital achieved with bigger businesses tending to achieve
higher returns. Nearly 50% of all farm business generate farm cash income
of less than $25,000 pa, an amount which represents less than a living
income. Many of these farm businesses would be better off financially by
leasing their land and investing some of the income into land improvements.
Expansion Options
A farmer who seeks to expand has several options which include share
farming, leasing, using contractors or entering into joint ventures with
other investors. The risks and rewards associated with each of these options
vary and each landowner and farmer needs to assess the suitability of the
option to their needs.
Comparisons with the UK and USA
Only 6% of all Australian farm land is leased compared with 35% in
the UK and up to 50% in the USA. The UK leases tend to be longer on average
than Australian leases and the USA leases tend to be much more varied as
to type depending on the farm system involved.
Very little intellectual property has been invested into the leasing of rural land in Australia and hence many leases are short term and do not adequately deal with the complex needs of landowners and tenants and the land itself. Land that is leased is frequently mined.
Sustainability
The definition of sustainability used in this book is the one used
by the Standing Committee on Agriculture and Resource Management (SCARM-
now the Primary Industries Standing Committee- PISC). This definition takes
into account the impact of the farm system on the environment both on and
off farm.
A farm business manager who aims to run the business in a sustainable manner needs to assess the condition and trends in all key resources. The key indicators of the farm condition identified by SCARM are long term net farm income, natural resource condition, off site impacts, managerial skills and socio-economic impacts.
Key attributes need to be identified for each indicator. These natural resource key indicators may vary from region to region and individual farm managers need to identify appropriate indicators for each farm.
Once a set of key attributes has been identified for each farm a report card can be prepared in order to provide an overview of the sustainability of the farm system.
Economics
The returns from farming are frequently low and extremely variable
even in regions which are relatively drought free such as the south west
of Victoria.
A traditional lease generates a guaranteed 5-6% return for the landowner and a variable return to the farmer tenant.
A participatory lease provides for a base return for each of the landowner and tenant and a sharing of income once a certain threshold has been achieved. Leases of this type are only suitable where there is a high level of trust and understanding between landowner and tenant.
Legal
It is important that the tenant knows and understands the legal and
taxation consequences of entering into a lease and therefore should choose
a legal structure which suits their purposes.
A well structured lease agreement will not only provide details of the landowner, land, tenant and terms of lease, but will also provide details of the landowners and tenants obligations under the lease, a dispute resolution clause, provision to assess the condition of the property at the start of the lease, and provisions for managing any specific issues relating to land management.
Best Practice
Wise landowners and tenants will prepare a business plan to ensure
that the conditions of the lease are consistent with the strategic direction
of their businesses.
A condition report will be prepared pre lease and reviewed each year ideally by an independent agricultural consultant.
Leases should ideally be for periods longer than 3 years and preferably be for 3 x 3 x 3 year terms when lease rates are reviewed at the end of each 3 year term.
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