Farmers have a wide range of funding options these days, with banks providing a spectrum of products from straight loans to sophisticated risk management tools such as commodity swaps.

But niche financiers are also carving out a profitable position in the rural lending sector, with Melbourne-based Cowbank Pty Ltd targeting the $3 billion Australian dairy industry by letting farmers lease their herds over a fixed contract period.

Cowbank was established about four years ago by former dairy farmer and manager Rod Banks. He was backed by Bruce Parncutt, the former chief executive of the stockbroking firm McIntosh Securities (now Merrill Lynch). Rod Banks has recently become a strategic investor, at one stage holding a share of the King Island dairy company where he was previously employed.

He says: "Bruce [Parncutt] is an enormously valuable resource in what we're doing. He is a good operator, a good thinker and direction person. He provided a lot of financial support and credibility." Banks.

Cowbank has a small staff and targets key dairy segments across Australia. It has about 70 herd leases, covering about 16,000 cows. Sourcing its rural funding from the banks, the company plans to branch out into other sectors including the much larger beef cattle industry.

"We operate Australia-wide in key geographical areas," Banks says. "There's a band of reliable rainfall along the bottom end of Australia, and the top end, so because we're in dairy we want to be in that band."

Banks says that, after extensive analysis, Cowbank buys the dairy herd a farmer has selected and rents it back over five years. For example, Cowbank might pay $1000 per cow and charge rent of $22 a month, including a monitoring fee and insurance. At the end of the lease, a residual payment of $200 per cow would be required to finalise the purchase.

Farmers are required to change 20 per cent of their herd each year to maintain the age and productivity of the stock. Profits from any surplus livestock sales are kept by the farmer, and any offspring are also kept by the farmer.

"We approve the credit. The farmer picks the herd. We then buy the herd and lease it back to them. We audit the herd and monitor the herd. The farmers maintain the herd of cattle, pay a monthly rental, and can buy the herd back at the end of the lease," Banks says. "It is a great business. We've built a good track record but I consider us still a start-up after four years."

Like the bank lenders, Cowbank has been affected by the drought. It needed to provide relief to farmers in the form of lease payment deferrals.

Banks says cow prices have dropped significantly as a result of the drought. "Prices are incredibly depressed. A cow you could buy last year for $1500 is now about $900 – they've nearly halved in value."

However, Banks says Cowbank continues to work closely with farmers to increase their net income by helping them plan and optimise the number of cows they can milk profitably. "We've tried to take the pressure off them a lot, and we've been on their farms, we've driven thousands and thousands of kilometres, just to be there," he says.

"We know that if you run a farm you have to grow about 4 tonnes of feed per cow. We've done enough analysis of enough farms to know levels of profitability. If you want to be a highly profitable farmer, the first thing you've got to do is grow quality feed and utilise three-and-a-half to four tonnes of feed per cow.