4 September 1998

Rent cuts – onus on tenants to prepare

FAILURE to achieve substantial rent reductions this autumn could drive some farmers out of business if the agricultural depression continues.

"There is a great deal at stake this time," says Antony Oliphant, senior consultant and chartered surveyor with Laurence Gould at Peterborough. Satisfactory results will require solid negotiation backed by a soundly prepared case and co-operation amongst tenants. "Landlords will, quite justifiably, resist large reductions is the absence of a robust argument."

Comparing 1998 budgets with those of three years ago suggests many tenants could rightly claim a 55% rent reduction (see table), although they are unlikely to achieve it, says Mr Oliphant.

"Even so, tenants must hold out for large reductions – 35-40% is not excessive, assuming a fair rent was agreed in 1995, even allowing for improvements over the next three years. Exceptionally high rents could well leave negative cashflows, rapidly eroding asset base and viability."

Figures comparing incomes for 1995 and 1998 for a 300ha (740 acre) mixed dairy and arable unit demonstrate an "alarming" decline in profitability, he notes.

"The difference is not necessarily greatest in the milk sector. Arable enterprises will now be experiencing similar declines. Whereas dairy yields and cow numbers have crept up on most farms, and quota and feed costs have fallen, arable crop yields seem to have levelled."

Lower produce prices and reduced aid payments have undermined gross margins. Fixed costs have increased by about 5% on well-managed holdings, especially labour, since staffing is likely to have been cut to the minimum in the previous farm recession.

Landlords will be cautious of relying on one years budget figures, warns Mr Oliphant. "Tenants agreeing rents on the high of 1996 will know this is prudent." However, falling land prices suggest there will be no quick recovery in farm incomes.

"Sentiment drives land values and the signals are clear. Sale values down 25-30%, and negotiated FBT rents have fallen by at least 30% on 1995 levels. This will be the backdrop to 1986 Act rents."

Levels will be determined largely by farm business economics, rents passed on comparable holdings, and the level of tenants improvements, notes Mr Oliphant.

Comparable evidence is at least as important as a budget. Tenants therefore should be wary of agreeing only modest reductions or standstill rents as this could become strong evidence against neighbours, he advises.

"Where possible tenants should talk to each other to share negotiating experiences." That is especially important given the "disturbing" volatility in agricultural markets, he adds.

"Rent review negotiations are likely to be increasingly contentious.The "horse deal" approach is no longer good enough in view of what is at stake."

Unless there is a marked improvement in product prices, Mr Oliphant predicts another crunch next year when producers seek to reverse the 30% rent increases of 1996. "Those due for a rent review on 29 Sept 29 1999 will need to serve their trigger notices before 29 Sept this year."

Mixed arable dairy farm budget 300ha (740 acres) 660,000 litres milk quota

Sept 1995 Sept 1998

No/acres GM Total No/acres GM Total change%

Dairy cows 120 1087 130440 127 825 104775 -20

Quota lease 144000 -0.12 -17280 229000 -0.07 -16030 -7

Heifers 30 442 13260 30 361 10830 -18

Wheat 300 351 105300 300 247 74100 -30

Barley 55 290 15950 55 212 11660 -27

Osr 104 320 33280 130 258 33540 1

Set-aside 81 130 10530 55 116 6380 -39

Gross margin 291480 225255 -23

Labour 46614 51936 11

Power/mach 79180 83560 6

Contract 7450 7750 4

Property 6200 5200 -16

Sundries 17760 15500 -13

Fixed costs 157204 163946 4

Mbrf* 134276 61309 -54

Rent (at 50 % mbrf) 67138 30655

Rent (£/acre) 91 41 -55

* Margin before rent and finance. Source: Laurence Gould Partnership.