22 August 1997

Arable rent rises unviable

RECENT claims by landlords that arable rents should go up this autumn are hard to justify.

Some of the arguments used include the reduced level of set-aside, the now legitimate inclusion of marriage value, falling input costs and low fixed cost inflation.

"But there are several factors which suggest a standstill or decrease in rents," says Anthony Oliphant of consultants Laurence Gould. In particular, he points to:

&#8226 Low crop prices due to the strong £, large carry-over stocks and quality fears.

&#8226 Lower area aid payments due to green £ revaluations.

&#8226 Rising interest rates to counter inflation.

To demonstrate the effects on farm profits, and hence the ability to pay rent, he has prepared a budget, comparing 1994 with 1997 and building in these factors (see table).

It is assumed that yields increased by 10% over the three years, but variable costs are unchanged. Even though the cost of seeds, sprays and fertilisers rose during the boom years of 1994 and 1995, these are now on the way back down as the rising £ and declining profits bare down on prices, says Mr Oliphant.

"Fixed costs have increased by just 5% over three years," he adds, "on the assumption that good managers will be able to control these, or there may be some cost spreading with the farming of other land."

According to the budgets, for a 200ha (500-acre) farm, net farm income between 1994 and the current season has dropped 15% to £53,583. Assuming a "fair rent" of 50% of the margin, this suggests the landlords payment should also drop 15% to £26,792.

The "true rent" will vary, depending in part on the level of tenants investment. "But, it is difficult to see how a rent increase can be justified this autumn, if it was last reviewed three years ago," says Mr Oliphant.

This is not to say rents will not go up in some circumstances. For example, where the landlord has made significant investments, or where rents were last agreed at unrealisticaly low levels, increases could occur.

And, while some tenants could justifiably argue for a 15% to 20% reduction, landlords could say this is placing too much emphasis on one years figures.

Either way, Mr Oliphant warns against using rents agreed last year as comparables. "Due to the rapid decline in market conditions and a subtle change in the interpretation of marriage value on composite holdings, few comparable rents are available to guide landlord or tenant." Instead, he suggests tenants use farm budgets to assess the rental value of their units.

RECENT claims by landlords that arable rents should go up this autumn are hard to justify.

Some of the arguments used include the reduced level of set-aside, the now legitimate inclusion of marriage value, falling input costs and low fixed cost inflation.

"But there are several factors which suggest a standstill or decrease in rents," says Anthony Oliphant of consultants Laurence Gould. In particular, he points to:

&#8226 Low crop prices due to the strong £, large carry-over stocks and quality fears.

&#8226 Lower area aid payments due to green £ revaluations.

&#8226 Rising interest rates to counter inflation.

To demonstrate the effects on farm profits, and hence the ability to pay rent, he has prepared a budget, comparing 1994 with 1997 and building in these factors (see table).

It is assumed that yields increased by 10% over the three years, but variable costs are unchanged. Even though the cost of seeds, sprays and fertilisers rose during the boom years of 1994 and 1995, these are now on the way back down as the rising £ and declining profits bare down on prices, says Mr Oliphant.

"Fixed costs have increased by just 5% over three years," he adds, "on the assumption that good managers will be able to control these, or there may be some cost spreading with the farming of other land."

According to the budgets, for a 200ha (500-acre) farm, net farm income between 1994 and the current season has dropped 15% to £53,583. Assuming a "fair rent" of 50% of the margin, this suggests the landlords payment should also drop 15% to £26,792.

The "true rent" will vary, depending in part on the level of tenants investment. "But, it is difficult to see how a rent increase can be justified this autumn, if it was last reviewed three years ago," says Mr Oliphant.

This is not to say rents will not go up in some circumstances. For example, where the landlord has made significant investments, or where rents were last agreed at unrealisticaly low levels, increases could occur.

And, while some tenants could justifiably argue for a 15% to 20% reduction, landlords could say this is placing too much emphasis on one years figures.

Either way, Mr Oliphant warns against using rents agreed last year as comparables. "Due to the rapid decline in market conditions and a subtle change in the interpretation of marriage value on composite holdings, few comparable rents are available to guide landlord or tenant." Instead, he suggests tenants use farm budgets to assess the rental value of their units.


What rent can you pay? (200ha arable farm)

19941997

AreaPriceGrossTotalAreaPriceGrossTotal

ha£/tmarginGMha£/tmarginGM

£/ha££/ha£

Wheat8510658449,640958851248,640

Peas281081855,1803274872,784

Rape5718733419,0386314524515,435

Set-aside303119,330103013,010

Area aid56,90364,984

Total200700140,091200674134,853

Labour27,00028,350

Power/machinery37,40039,270

Property/misc13,00013,650

Total fixed costs38777,40040681,270

Net farm income31362,69126853,583

Rent (at 50% of NFI)15731,34613426,792

Assumptions:

1994 yields – wheat 8.03t/ha,rape 3.21t/ha, peas 3.71t/ha

1997 yields – wheat 8.85t/ha, rape 3.53t/ha, peas 4.08t/ha

Variable costs – wheat £267/ha, rape £267/ha, peas £215/ha