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Independent.ie

Tuesday 25 April 2017

Facts and figures: Is land leasing as lucrative as dairy farming?

The constant demands of dairy farming can be challenging for those farmers nearing or in the pension age bracket
The constant demands of dairy farming can be challenging for those farmers nearing or in the pension age bracket

Martin O'Sullivan

In this article I will look at the financial case for leasing versus farming.

Two weeks ago I looked at the practical pros and cons of leasing out the farm.

In order to make a realistic comparison I will compare dairy farming with leasing out the farm, as making comparisons with dry stock or tillage would clearly be a mismatch given the poor returns these enterprises are currently yielding.

Rising milk prices are likely to exert upward pressure on rents once again and a more positive outlook for dairy commodities is likely to tempt more dairy farmers into long-term leases. The rental market for land in 2014 and 2015 went a little bit off the scale with rents of up to and beyond €300/ac being paid. While this is good for the landowner it may not be sustainable for the tenant.

This was partially caused by strong milk prices, but also due to the onset of the Basic Payment Scheme and the additional demand for land associated with the Young Farmer and National Reserve Schemes.

However, 2016 saw rents return to a more sustainable level whereby they were still attractive to the landowner but also a bit more affordable for the tenant. Typically new leases in 2016 saw rents close to or maybe under €200/ac, but early indications would suggest that 2017 will see rents creeping up to or above the €200/ac figure, and even considerably higher in the stronger dairy areas.

Case Studies

Every case will be different so I am using a fairly typical scenario of a 120ac farm currently being farmed exclusively as a dairy farm with 80 cows and followers, along with a Basic Payment of €12,000.

The farm profit, including Basic Payment, is calculated to amount to €52,000 based on a milk price of 31c/l as per the 2017 ACA Farmers' Handbook.

In the two case studies set out in this article it is assumed that the Basic Payment entitlements will yield a rent equivalent to 100pc of their payment value, but it's important to remember that continued leasing of entitlements may be dependent on future Basic Payment Scheme rules or, indeed, its successor scheme due in 2019.

zzzz land leasing v dairy farming.PNG  

Conclusions

In Case Study 1 there is a net financial benefit of €4,170 in favour of farming but the leasing option could yield certain benefits such as entitlement to education grants as the gross income is under the eligibility threshold.

In Case Study 2 there is actually a small benefit in favour of leasing which may just be the stimulus that a pensioner farmer needs to make the hard decision.

In many cases, however, the main deterrent to leasing the farm is the cessation of farming activity that removes the incentive to get up in the morning.

This is a very real concern that for many may outweigh the financial considerations.

However the constant demands of dairy farming can be challenging for those farmers nearing or in the pension age bracket.

Perhaps consideration could be given to retaining a small acreage to continue a livestock enterprise while leasing the bulk of the farm.

Continuing with a farm enterprise, however small, may have its benefits such as the favourable treatment afforded to the owners of leased out entitlements when the Single Farm Payment Scheme was replaced by the BPS.

Another option worthy of consideration may be some form of collaborative arrangement with your prospective tenant such as replacement rearing or relief milking.

Semi-retired farmers could still have an important and rewarding role to perform in the dairy industry.

Martin O'Sullivan is the author of the ACA Farmers Handbook. He is a partner in O'Sullivan Malone and Company, accountants and auditors. www.som.ie. Ph: 051 640397

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