Contract farming agreements were significantly more profitable in 2006 on the back of improved cereals prices, says consultant Bidwells.

Figures drawn from accounts covering 26,000ha (64,000 acres) of contract-farmed land managed by Bidwells and based on the 2006 harvest year, showed that landowners’ average income rose to £96/acre, compared with just £81/acre the previous year.

Similarly, the contract farmers’ average income improved by over 25% to £147/acre. The figures included income from single farm payments and environmental stewardship schemes covered by contracting agreements.

Bidwells’ head of farm management David Cousins said it was the most significant increase in contract farming profitability for over a decade.

“It’s not just driven by cereals prices – rapeseed and root crops have performed well, too. A year ago we were concerned that a combination of low commodity prices and spiralling energy costs were looming over the industry.”

Farmers’ fixed costs had risen 13% on average, Mr Cousins said. “Included in that are property costs, drying and storage, administration and finance, together with an increase in contractors’ charges from £91/acre to £104/acre.”

A significant number of agreements were revised before the 2006 harvest year to reflect contractors’ higher labour and machinery costs.

Variable costs in contract farming arrangements had remained relatively static, although Mr Cousins said that, while some farmers had cut input spending aggressively in recent years, there was some scope to reassess the optimum use of fertiliser and agrochemicals.

Prior charges – the landowner’s first share of any profits after fixed costs and contractors’ charges – rose £4 to £75/acre, with average profit shares on top of this worth £21/acre. Contractors’ profit share levelled at £40/acre, compared with £22/acre in 2005, a 25% improvement.

Despite the improvement in the profitability of contract farming operations, Mr Cousins doubted whether many new agreements would be set up as a result. “With better returns from arable farming it seems questionable whether more people will be as focused on restructuring their businesses in the short term.”

However, contract farming agreements could offer significant benefits, he added. “Fundamentally, the situation has not really changed and contract farming agreements still offer significant benefits by bringing together two parties – one with labour and machinery and the other with land and buildings – to farm in a more profitable way.”

Unlike most tenancies, CFAs allowed the landowner to retain the single farm payment while allowing for the release of working capital from the business, he said. Coupled with this, the landowner retained his status as a trading farmer attracting potential income and capital taxation benefits.

But recent landmark cases like McKenna and Antrobus had caused many farmers wanting to protect Agricultural Property Relief on farmhouses to think twice about such agreements. This meant it was even more important that agreements were tailored carefully and run as intended, Mr Cousins said.

Strong cereals markets helped boost contract-farming returns in 2006 and markets have remained firm this year.

ian.ashbridge@rbi.co.uk