Thursday, November 14, 2019

Profits from contract farming still above five-year average

September 10, 2019 by  
Filed under Property

Net profits from contract farming arrangements were better than many expected last year – despite falling due to on the back of lower output, confirm the latest annual results.

Improvements in commodity prices limited the impact of lower crop yields caused by extreme weather – keeping results well above the rolling five-year average, according to Bidwells annual analysis for 2018.

Farm income

Income from most cereals and pulses was higher than the previous year, with wheat sales contributing £1295/ha to the top line compared with £1217 in 2017. Oilseed rape income was down sharply at £1059/ha, a fall of £100/ha on the year.

The fall in rape income was an “indication of some growers’ struggles to make this crop work economically without an effective solution to cabbage stem flea beetle,” said Bidwells. Lower sugar beet yields and prices also made a lower contribution than in previous years.

But the contribution from stewardship payments was higher – perhaps reflecting an increased appetite among farmers to engage with Countryside Stewardship following the introduction of simplified wildlife offers, as well as an anticipated decline in other support payments.

Variable costs climbed year on year by more than £10/ha, mostly driven by increased fertiliser prices, although spray chemical costs crept up too. While contractor’s charges changed little, other overhead costs continued to rise, climbing by nearly £20/ha, says Bidwells.

“It is difficult to pinpoint the precise cause behind this increase; however it is reflective of the generally growing cost burden on farming businesses, which will add to the pressure on margins should crop prices decline or when reductions in agricultural subsidies begin to bite.”

Total net profit for the year fell to £431/ha (£175/acre) compared to 2017 on a lower gross output of £1256/ha (£508/acre). Even so, this profit was still £15/ha (£7/acre) higher than the rolling five-year average of £416/ha (£168/acre).

“Few would have expected the 2018 performance to have been as strong as the previous year,” says Bidwells. “Overall, the 2018 financial results reveal a level of profitability which may be greater than expected, given the extraordinarily difficult weather conditions during the growing season.”

Rising costs

But Bidwells also says that the dip in profit also highlight the significant contribution to farm profits from area-based support payment – and the increase in variable and overhead costs experienced by many growers.

Contract-farming agreements typically consist of a farmer’s first charge on net profits – often called the Prior Charge – and an established basis for division of any remaining profits between the farmer and their contractor.

The 2018 results show little change to the farmer’s total return beyond a modest increase from £380/ha to £385/ha. By contrast, the contractor’s total return (contracting fee plus share of rateable profit) fell by about £15/ha.

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