Lincoln University agribusiness lecturer Edward Percy, a registered valuer, said a sector like dairy is in something of a perfect storm with water regulations, greenhouse gas limits, Mycoplasma bovis concerns and tighter bank repayment conditions all biting at farmers’ heels.
And fewer properties are selling, thanks in part to regulations on overseas investment in farmland limiting the market for what are often high capital cost land holdings.
Many farmers are also concerned about Fonterra’s future.
“You suspect there will be people thinking about getting out and maybe leasing is an option,” Percy said.
The dairy market is in an unusual place where sentiment is low yet payout predictions are reasonably positive.
Leasing for sheep and beef farms is already reasonably common and he was involved in a family venture in the North Island that had worked out well.
“It can be a good pathway for succession, for the parents to step off and lease to their son/daughter.”
In the past six months there has been more inquiry about options for dairy farm leases in an environment where sales are relatively light, though properties in good areas are still fetching good prices.
Bayleys national country manager Duncan Ross said the move to leasing also represents an age-and-stage moment in the rural property market.
“Leasing offers the opportunity to manage your exit from the farm, at a personal and business level.”
Lease-to-buy agreements can also provide a stepped pathway, with younger blood capable of keeping the property compliant with new regulations and materially up to scratch.
And younger farmers struggling to meet tighter bank lending conditions can find leasing helps them get a farm under their feet they can treat as their own.
A long-time Waikato valuer confirmed more interest in dairy leasing over past months, with farmers having the option to quit their Fonterra shares, livestock and plant, move off the farm but keep land ownership if they are not happy with the sale price they maight have to accept.
“Under past circumstances, with supply being tight, the cost of leasing has tended to be propped up fairly firmly by that. Now, with less sharemilking opportunities around, leasing presents an appealing option if there are more properties on the market and available for lease.”
The level of debt plays a factor in determining if leasing is an option and the historically lower debts on drystock farms often make it viable. Returns can typically fall between $15-$25 a stock unit a year.
For dairy units returns of about $1200 a hectare a year can be expected.
For an average sized 140ha dairy unit that represents a return equal to the annual interest payment on an average dairy debt of $20-22/kg milksolids.
But for an average dairy farm with no debt the $170,000 a year return might prove more appealing than selling the farm and having to invest at a time when interest rates are falling.
With regional plan changes like Plan Change 1 (Healthy Rivers) in Waikato starting to kick in, land capable of running livestock might also become more sought after, given changing land use into livestock is all but ruled out under the new regulations.
Total Ag farm adviser and director Rob Macnab said when the farm is a farmer’s main asset there can be a reluctance to sell it, even if they no longer want to work on it and leasing is a viable alternative.
“And increasingly we are finding more guys who have not sold the farm have died, leaving them in trusts, often to beneficiaries who don’t have the skills to run them.
“We have not quite got there yet in dairying but I believe it is going to be more likely. At present contract milking and 50:50 positions are still the pathway.
“But long-term leases for sheep and beef are more common.”
High livestock prices also give older sheep and beef farmers the chance to exit and live somewhere else.
He agrees for many the prospect of tighter environmental and regulatory laws dampens their enthusiasm to continue and often they are better dealt with by a younger generation coming onto the land.
The historic return for leased farmland has typically been low at about 2-3% a year but that looks increasingly attractive in a low-interest environment, Macnab said.
Fellow Total Ag director Aaron Baker in Northland urged farmers to take a careful assessment of their potential lease partner, treating it like an equity partnership. It might also require a longer-term contract than the three-year sharemilking contracts most farmers are familiar with.
