The People in Dairy

Leasing a dairy property

With the ability to buy and sell farms becoming increasingly difficult, leasing may offer both Lessor and Lessee the opportunity to achieve their long term goals. When people lease a dairy property they operate a dairy business by renting the land while owning the cows and mobile plant and equipment.

When landowners lease their property, they are providing their land and fixed plant (capital assets) to another person (Lessee) to operate a dairy business in return for an agreed amount per year. This then means that the landowner (Lessor) has minimal (if any) control of the dairy business or its activities but may set some terms and conditions about how the asset can be used. The precise details of the agreement will vary to suit both parties but this is the overall concept of leasing.

Leasing may be an option for landowners who want to retire from active farming but are not ready to sell the property. In this situation, leasing frees up time and energy for other pursuits and generates an income without having to sell the property. It may also be an option for investors who are mainly interested in capital growth of the land and receiving a reasonable rental for the asset.

Leasing may be an option for farmers who seek full control over their dairy business without borrowing heavily to purchase land. They are likely to already own all or part of the herd and mobile plant. Dairy operators can grow wealth while leasing a property. They may use the profits to increase equity in their dairy asset, expand their business or to invest in non-farming assets.

A successful arrangement involves mutual respect and trust but is based on a written document which clearly states the expectations of each party. In successful leasing arrangements, both parties have an appreciation of each other’s position and are very clear about what they can expect from each other over the period of the lease. Download our working checklist for arranging a dairy property lease agreement.

Seek help in developing a leasing arrangement

It can be helpful to draw upon the experience of a trusted farm adviser to discuss issues and come up with an arrangement that works for both parties. The discussions in preparing a lease agreement give both the landowner (Lessor) and the Lessee an understanding of each other’s perspective which provides a good foundation for building the relationship - find an adviser

Property law and legal requirements of a lease differ between states, so it is essential that the final document is prepared by a solicitor.

Dairy career paths and farm ownership

Like anyone involved in a business, the long term goal for dairy farmers is to grow assets and wealth during their time in the industry.

Traditionally, progress in the dairy industry has been focused on achieving the ultimate goal of farm ownership, as this has been seen as the best way to grow wealth. Entrants into the industry have generally spent time as an employee and/or experienced a period of share farming, during which there is growth in skills and assets, followed by a period of leasing, with a further increase in assets and skills and eventually dairy farm ownership. Read more about how leasing can assist towards farm ownership  

Stepping Stones provides information on the different types of careers on a dairy farm and explores pathways available for people looking to start or experienced people who want to progress their dairy career further. 

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Risk, control and reward

The Lessee has total control over the business and also carries the risk. For the landowner (Lessor), leasing does not involve frequent contact with the tenant (farmer). This is a major difference between share farming and leasing a dairy property. A Lessee with the right skills reaps the rewards for their good management with a healthy profit but also incurs the risks of operating a dairy business in a volatile environment.

Landowners need to understand that the rental income reflects the landowner’s level of involvement in the business and risk. The rental income may be less than the interest that could be earned by selling the property and investing the money. In addition to providing a secure income, leasing allows the landowner to continue to build wealth through growth in the capital value of the land.

Progressing from share farming to leasing
Farm Scenario

After 10 years of share farming, and eventually owning a herd, Nathan and Deanne desired greater control of a dairy business. They transferred from a 50/50 share to a lease on their existing share farm. They were then approached by another owner to lease his farm. They had some stock, borrowed for the rest and employed labour. This landowner then purchased another two dairy farms and indicated that he would like Nathan and Deanne to lease all three. They moved from their original farm and now lease the three, all owned by the same owner, and milk a total of 900 cows. They have no intention of owning a dairy farm and have invested in several coastal properties. This arrangement allowed gradual growth, consolidation, and skill development.


Alternative to farm family succession
Farm Scenario

Anne and Martin made several unsuccessful attempts with the family to progress a succession plan from a 40% share on the family farm. By the time they were in their 30s they owned some land (not a dairy), cows, plant and some young stock. They were offered the opportunity in the middle of the 2006/2007 drought to lease the adjoining dairy farm, with an old 40 unit dairy capable of milking 400 cows.

They are very good operators in all aspects, especially financial management. They took the opportunity and have increased their assets to $3.0 million net; their average return on asset per year has been 28%. There have been capital improvement issues and they recently funded the construction of a 50 unit rotary dairy on the lease farm, which they will leave behind if the lease ceases in 10 years but which gives them the capacity to milk more cows. It’s a profitable business and could justify this capital expenditure - even though it’s not ‘normal’. A good example of mutual respect, and thinking outside the square.

Dairying under a leasing arrangement (Lessee)

Dairy operators may lease a property as a step in their career path towards farm ownership. Others may choose always to rent land to create wealth. Regardless of the long term goal, a major reason for individuals moving from share farming to leasing is to gain complete control and reward for their efforts. If they are good operators, they will also increase net returns and build wealth. 

Read more about being a Lessee

Landowners leasing their dairy property (Lessor)

Landowners (Lessors) may be ex-dairy farmers who do not want to sell their farm but for various reasons don’t want to operate their dairy business any longer, or investors who are mainly interested in the capital growth of the land and receiving a reasonable rental for the asset.

The Lessor receives rental income in return for handing over control of the land to the Lessee. Under a lease agreement, the landowner or Lessor has no control of the dairy business. 

Read more about being a Lessor

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Ingredients of a successful leasing arrangement

There are many very successful, long-term leasing arrangements that enable both parties to achieve their long term goals.

A successful arrangement involves mutual respect and trust but is based on a written document which clearly states the expectations of each party. In successful leasing arrangements, both parties have an appreciation of each other’s position and are very clear about what they can expect from each other over the period of the lease. 

Read more about the features of a successful arrangement (from lessee and lessor perspectives)

Lease arrangements and rental rates

A ‘true’ lease involves an annual rental, which is a fixed amount per annum, generally paid monthly or quarterly in advance. The rental rate will normally not be adjusted in relation to variations in milk price or conditions being experienced in the dairy industry during a given period.

The rental will either be fixed for a period and then be re-negotiated or have a method of allowing for annual increments. 

Read more about lease arrangements and different perspectives on setting the rental rate

The Murray Dairy cluster farm project has developed an equitable framework document and spreadsheet, which outlines a process for determining an equitable return for potential business partners -  read more

Young gun returning home
Farm Scenario

A young (mid 20’s) son was keen to return to the home farm, which milked about 200 cows. He did enough number crunching that indicated that it may be difficult on 200 cows. He then approached a neighbour and secured a reasonably long term lease on an adjacent area that he could milk off, given some work and pasture renovation. Cow numbers could then go to 300 which was possible with the existing facilities. He and his wife then worked out a share arrangement with mum and dad. The result so far has been a viable dairy farm, and dad has actually had holidays for the first time in many years. This arrangement demonstrates financial savvy, leasing the neighbour’s land, and mutual family respect. 

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Setting up a successful leasing arrangement 

Generally the lease will involve a formal commitment for a fixed non-negotiable period of time and at a specified cost. Therefore, it is critical that each party is aware of what is involved and, in particular, what is expected during the lease period. For an agreement to be successful, the conditions must allow both the Lessee and the landowner (Lessor) to achieve their goals. There are many issues that need to be discussed and clarified - read more about setting up a leasing agreement

Leases legal requirements, renewal and renegotiation  

The legal requirements for entering into and formalising leases vary from state to state. It is recommended that legal advice be sought and the lease be prepared by a solicitor with expertise in this area of the law. Read more about the legal requirements of leases (inc registration, stamp duty, residential tenancy and other legislation)

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