Don't let your heart rule your head when it comes to renting farmland

Renting extra land is a sound business option for the expanding dairy sector, but makes little sense for beef and sheep farmers

Some dairy farmers might find greater potential for profit from their existing herd rather than chasing scale and volume with all of its associated costs such as stock, infrastructure, labour and land rental.
Some dairy farmers might find greater potential for profit from their existing herd rather than chasing scale and volume with all of its associated costs such as stock, infrastructure, labour and land rental.

Martin O'Sullivan

I am frequently asked many questions by farmers in the course of my work about the pros and cons of renting out land but I am seldom asked if renting in land is a good idea.

I suspect in many cases the question is not asked for fear the answer may not be what the person wants to hear.

Farmers rent land for a variety of reasons but mainly to extend their farmed area.

In many cases I failed to see the benefit so I decided to undertake a survey of farmers currently renting land and the following are a list of the most common reasons given for renting in land:

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* Don't have enough owned land

* Have entitlements available for the rented land,

* Neighbouring land - couldn't let it go

* Dairy farmer needs it for dry-stock,

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* Dairy farmer needs it for replacements,

* Dairy farmer needs it to support expanded herd,

* Have been renting the same land for years - never really thought about it.

EXPANDING THE HOLDING

The most common reason given for renting was that the existing owned land base could not support the current enterprise.

For most of the dairy farmers questioned they were happy that renting made financial sense and in most cases I could not argue with their thinking.

In the case of beef and sheep farmers the logic provided for renting would in most cases entitle them to a free pass to a home for the bewildered.

Most of them agreed that they were making little or no money but couldn't countenance the thought of cutting back stock numbers.

The proposition that they might actually be left with more profit by scaling down was alien to them despite the fact that most of them acknowledged that their scheme payment such as BPS, Glas etc well exceeded their profits.

I am happy to report that the specialist tillage operators were by and large the exception to the rule in that they had a good handle on the margin that the rented ground provided and had strict limits on the amount that they were prepared to pay for conacre. This is evidenced by the fact that tillage ground for cereals is generally commanding less rent than grazing ground. That said, there were one or two respondents in this cohort who had paid ridiculous money for conacre and couldn't really explain why.

I could only put it down to their competitive instinct: they were not going to be beaten at an auction.

EXPANDING THE ENTERPRISE

Plans to expand the enterprise was the reason given by those dairy farmers who had recently taken on additional rented land. Interestingly, I failed to identify and beef farmer who had recently taken on additional rent land.

Taking account of current beef price, or indeed prices over the past 20 years, expanding the beef enterprise offers little prospect of increased profit and it is easy to understand why demand for renting additional land is not an option for those farmers.

The typical net margin from whatever beef system you might choose is less than €200 per acre including subsidies. Rent for good land will be in that bracket and possibly higher so there is little left to cover the associated overheads not to mention a return for one's labour.

Dairy farmers on the other hand were confident that upscaling made good sense and for many it did.

The typical gross margin from a diary cow is in the region of €750 per acre so even if rent accounts for maybe a third of that, there is still €500 per acre left to meet overhead costs and a return on labour.

That said, some of the farmers I questioned who were in expansion mode were more focused on volume and had scant regard for what it was costing them to produce a kilo of milk solids.

These guys might find greater potential for profit from their existing herd rather than chasing volume with all of its associated costs such as stock, infrastructure, labour and of course land rent.

A 70-cow herd leaving a net profit of €1,000 per cow, which is the target that most efficient producers will strive for, is equivalent to a 140-cow herd achieving €500 net profit per cow. Unfortunately, the €500 per cow figure is far more commonplace that the €1,000 figure. Efficiency in dairying can be far more bountiful than scale. If you can achieve both, happy days!

THE DAIRY DRYSTOCK FARMER

This cohort is still alive and well and renting in land to support the dairy beef progeny generally as far as finished cattle.

The appeal and justification lies in the fact that it brings in a lump of cash at a time of year when cash is needed. I can say with certainty that this practice is not making money and is adding significantly to farm labour demand.

Over the years I have analysed countless dairy farmers' accounts and the outcome in all cases is the same: beef from the dairy herd shows little if any profit. Where land is being rented in to support the beef enterprise, I can say with certainty that it does not leave any profit.

Where a farmer has scope to simply replace the beef stock with increased cow numbers, the impact on profits can be substantial and can well justify the cost of land rent. Even if that farmer is not in a position to replace the beef stock with dairy stock, he will make the same profit with or without the beef enterprise and he will have a lot less work to do and no need to rent land.

CONCLUSION

Renting land is a costly business and the potential benefit to the overall farming operation should be closely assessed. Scale can be good for the ego but not necessarily for the bank account.

Given current cattle and grain prices it is difficult to see where profit can be made for the average beef or cereal farmer on his own land not to mention rented land.

The story is somewhat different for dairy farmers but scale is not an antidote to lack of efficiency. This is the time of year when land for rent will come to the market, so weigh and consider your options and don't let your heart rule your head.

Indo Farming


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