Martin O’Sullivan: Why farmers need a dose of realism when it comes to leasing land

The yields of established farms over the last few decades suggest that the only people likely to benefit from land leasing are efficient dairy and arable farmers, but it is not always the efficient ones at conacre auctions in the first row with raised hands can be found.

The efficient companies are more focused on getting the most out of their existing businesses, and when they lease land, it does so at a manageable cost when the extra scale is matched by efficiencies.

​

The current market

Prices are soaring, driven by the dairy farmers – for them it makes financial sense at a milk price of 58c/l.

Net income from dairy farming is currently nearly twice that of its closest competitor, tillage, and more than four times that of sheep or beef.

It is unlikely that this situation will change in the foreseeable future. That said, there are many parts of the country where dairy farming has all but disappeared, but rents have also skyrocketed recently.

This is more due to the contagion effect than an increase in profitability in cattle or sheep production.

Many farmers need a dose of realism when it comes to leasing land because if the rent exceeds the likely return then it doesn’t make sense – and unfortunately in many cases it does.

​

Reasons for renting land

In many cases, renting can make sense, in others not at all. The situations where leasehold land might be justified are:

■ Reaching a sufficient size to facilitate profitability;

■ optimization of the grazing platform;

■ Reduction of the stocking density – future security;

■ Comfort – makes work easier;

■ Increased production.

​

I will examine the relevance of these justifications to the main farms.

dairy farmers

Leasing land for dairy farmers is not necessarily about making more money.

With the looming specter of challenging CO2 emission limits, not to mention water quality regulations, leasing land should be as much about planning for future storage constraints as it is about increasing production.

I have no problem with farmers leasing land to expand their business if the existing business is run efficiently, but you cannot recommend expansion as an antidote to inefficiency.

So if leasing land is justified, the amount a farmer should pay will be determined by the impact that the additional land will have on his profitability or the medium-term sustainability of his farm.

The typical net profit of an efficient dairy farm over the last five years is in the order of €900 per cow, so on the face of it a dairy farmer should have no trouble paying for leased land, regardless of price, assuming milk prices remain fairly strong.

The chart below shows how much the milk price has fluctuated over the past 10 years; I would expect the same for the next decade.

Obviously the high rents mentioned are a function of the milk price in 2022. But if it fell back to 40c/L, which would have been considered a reasonable price in 2021, the typical drop in profit per cow would be of the order of €960. In other words, the gain would be wiped out.

Potential tenants should keep this in mind. It would be very foolish to think that the milk price slide has locked in.

Will milk cost 57 cents a liter by this time next year? Probably not, and if so, €500/ac doesn’t seem like such a bargain.

​

tillers

Arable farmers make up a significant part of the leasehold market and lease prices for arable land tend to be more realistic than comparable grazing land.

Because soil cultivation has become very specialized and works with relatively narrow margins.

Few arable farmers have the leeway or willingness to pay exorbitant rents, and they are mostly not to blame for the current high prices.

​

cattle and sheep breeders

The average farm family income for cattle and sheep farms in all systems was €190/ac in 2021, including direct payments, according to the Teagasc National Farm Survey in the region.

The sad reality is that they have been priced out by the property market because they simply cannot come close to supporting current market rents.

So regardless of whether an intended lessee has any available claims, they will lose money, and it’s just a matter of size.

Martin O’Sullivan is the author of the ACA Farmers’ Handbook and is an agricultural business and accountant based in Carrick-on-Suir; www.som.ie