How to choose the best strategy for your agribusiness

As a farmer or agribusiness owner, your land is a crucial input and a significant financial investment. It doesn’t matter if you’re starting out or looking to expand. The decision to buy or lease farmland is an integral part of your strategy.

This blog explores the pros and cons of buying and leasing farmland. 

We’ll assess the factors involved, including:

• prevailing and forecast market conditions
• your financial stability 
• future growth plans. 

Like most decisions in farming and agribusiness, making the right choice depends on your own circumstances. 

Leasing farmland 

You want to expand or scale production, but buying land is a big decision. It often involves a large upfront purchase, which may leave you cash poor or with a debt burden. This may limit your ability to invest to get the most out of the land.

Here, leasing may be an attractive option, especially if you need financial flexibility. But that’s not the only benefit. 

Lower capital requirement

By leasing farmland, you can access land without a significant initial investment. This is useful if you’re new to farming or looking to expand but don’t want to tie up capital. 

More financial flexibility

Without a large mortgage from buying land, you can invest in inputs or equipment and fund your operations. This will support cash flow and limit your financial risks, especially when weather or economic conditions are uncertain. 

Try your land before you buy

By leasing farmland, you can test the land before making a long-term investment. Trial the location, soil, or climate conditions to make sure they work for you and what you’re hoping to grow or raise. This is especially important if you’re looking to expand into a new region.

Tax benefits 

If you need to reduce your taxable income and improve financial efficiency, consider leasing. In many cases, lease payments are a deductible business expense. 

Challenges of leasing land

While there are benefits to leasing farmland, that you should weigh up your options before signing a lease. Like any business decision, you also need to consider the downsides. 

• Lack of ownership – you’re not building equity in the land so you may miss out on potential capital gains
• Lease uncertainty – there’s always a risk the lease terms may change, rent may increase, the landowner may sell or decide not to renew your lease.
• Limited control – your lease might restrict how you use the land, what you produce or changes you might make to infrastructure.

Buying farmland

Leasing farmland might look like an attractive option. But owning land is a long-term investment that can provide security and stability. Here are some reasons buying land might be the right choice. 

Build equity over time

If you buy land, every time you make a mortgage payment, you are building equity. This gives you financial security and there is potential for the value of land to increase over time. 

Long-term stability

Owning your land gives you and your business stability. There is enough to worry about in business without worrying about changes to your lease or losing access to the land.

Control how you use the land

As the landowner, you decide how you manage the soil, what you build on the land, and the production methods you use.

Asset for future generations

Farmland is a key asset in succession planning. By owning the land, you allow for generational wealth transfer and provide a long-term future for the farm and your family.

Challenges of buying land

As with leasing, there are also challenges to buying land, which we have touched on above.

• High initial cost – you’ll need a deposit and the funds to keep financing the mortgage.
• Increased debt load – adding (another) mortgage means your financial commitments increase, which could add extra pressure, especially in tough seasons
• Market risks –land values can decline and an economic downturn could affect your financial position. 

Making the right decision for you and your farm

To lease or buy (land)? That is the question. And the answer depends on your financial circumstances, business goals and market conditions.

Before you jump in and sign a lease or a contract to buy, there are a few things you should consider.

Your current financial position

How much capital do you have?

What is your borrowing capacity?

Do you have stable cash flow?

Your long-term goals

Are you building equity and looking at succession plans? Ownership might be the best option.

Would you prefer flexibility and lower risk? Then maybe you should consider leasing.

Market conditions and forecasts

You need to consider the overall economy, as well as the market for the products you’re raising or growing. Make sure you look at land prices, interest rates and finance options. Consider supply and demand projections in your sector.

Your growth strategy

If you want to expand quickly, but have limited capital, leasing farmland is the best option. But if you’re more interested in long-term stability and building wealth, considering buying land.

Your agribusiness broker can help you decide

Deciding between buying and leasing farmland is a complex decision that requires careful analysis and planning. Your agribusiness finance broker will help you understand your current financial position and future plans. They can also explore loan options and tailor financial solutions that meet your short and long-term business and personal needs. 

Need some advice

Not sure if buying or leasing farmland is the right decision for you? Get in touch and I’ll help you explore the options to find the best solution. 

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