Thursday, November 14, 2019

Contract farming survey highlights value of joint ventures

July 2, 2019 by  
Filed under News & Business

Higher commodity prices and a favourable exchange rate for the calculation of basic payments saw an increase in arable farming returns from contract farming agreements for harvest 2018 – despite lower yields.

The average divisible surplus from agreements for harvest 2018 was its highest for four years, according to provisional results from Strutt & Parker’s annual survey, which covers 19,400ha of land mainly in the East Midlands, East Anglia and south-east England.

Total returns to the farmer averaged £375/ha in 2018 compared to £361/ha in 2017, said Strutt & Parker farming department director Richard Means. The results were published at last month’s Cereals event, held on 12-13 June at Boothby Graffoe, Lincolnshire.

Keeping control

This is an income comparable to the rent farmers would receive from a three- to five-year farm business tenancy. But contract agreements mean they retain control of farming practices and the tax advantages of being a trading business.

Looking back over the past five years, contract farming agreements have also produced profits to the farmer (five-year average of £346/ha) above those achieved by the middle 50% of in-hand farming businesses (£319/ha).

The contractor’s total income was very similar to that of the farmer at £386/ha (£362/ha in 2017), said Mr Means.

“Given the challenges of 2018 in terms of the weather, it is very positive to see a rise in the total returns to both parties with improved wheat prices, around £30/t higher year-on-year, offsetting lower than average yields.

“Variable costs for the 2018 crop were very similar to 2017, lower than the five-year average due to a continued shift in rotations towards lower input cost crops, as growers move towards more robust wheat varieties, as well as growing spring barley and spring oats.”

Contract farming agreements are joint ventures where the farmer or landowner provides the land and buildings and engages the services of a contractor to grow the crop. The contractor provides labour, machinery and management expertise but crops grown are property of the farmer.

Increasingly popular

Mr Means said he was expecting contract farming agreements to increase in popularity over the next few years due to a combination of factors – including the phasing out of the Basic Payment Scheme, as set out in the government’s Agriculture Bill.

“There will be a need for some farmers to adjust their business structure to adapt to reduced levels of direct subsidy. The core overheads within the industry vary by over £200/ha between the top and bottom quartiles and this difference will not be sustainable with the loss of the basic payment.

“The incentivised nature of contract farming agreements is such that it rewards innovation and better performance, which will be key to maintaining profitable farm businesses in the short- to medium-term.

“We are already seeing that some farmers who require more consistent returns to help service investment in other projects are turning to contract farming agreements as a way of managing rising volatility in farming.”

Contracting farmers were still keen to take on more land, said Mr Means. But they were being strategic about choosing which farms to tender for in terms of their proximity to their own units and whether they had good grain storage facilities.

Over the past five years, contractor’s charges have been on the rise as they sought to lock into higher guaranteed returns and ensure that the farmer bore a greater proportion of the risk from market volatility.

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