5 September 1997

Still pays to take extra land

By Philip Clarke

DESPITE all the talk about rents having to fall as farm incomes come under pressure, some farm business tenancies are still making prices of over £150/acre.

And, despite the talk, it can make economic sense to pay this much for arable land, say accountants Grant Thornton.

Using current crop prices and area aid, plus actual yields and variable costs achieved by the firms own clients, their analysis shows, even for the least profitable farmers, that it still pays to take on extra land. The key is the spreading of fixed costs over a wider area.

"A common mistake when assessing a farms ability to afford more land is to take the fixed cost per acre for the existing business and apply it to the additional acres," says consultant Robert Jones. "This ignores the concept of spreading overheads. Where there is already sufficient or surplus labour and machinery, it is possible to expand without incurring significant additional fixed costs." As table 1 shows, the average Grant Thornton client acquiring another 200 acres would expect to make a gross margin of £230/acre this season. Extra fixed costs come to just £34/acre. After paying rent of £150/acre for the additional land, that still leaves a net gain of £46/acre.

"Even for the bottom performing 25% of our arable clients, there are potential profits to be had by taking on more land," says Mr Jones. "Conversely, a farmer in the top performing 25% may not be able to afford this sort of rent if the extra land means he has to employ more labour or machinery."

Another way of looking at it is to calculate the effect on the business as a whole (table 2). For the "average" farmer on 1000 acres, adding another 200 acres at a rent of £150/acre will boost profits by £9200 to £53,200.

Again, the key is spreading fixed costs, which come to £186/acre on the existing unit and £34/acre on the additional 200 acres.

"Another common mistake in estimating what rent can be paid is to use contractor rates to assess the cost of working the extra land," says Mr Jones. "Not only do contractor rates include an element of profit, but again this ignores the concept of spreading fixed costs."

A typical fee might be £90/acre. If this was applied to table 2 instead of the £34/acre actual additional cost, then the profit before rent would be £140/acre. It would then be deemed the farmer could pay up to £140/acre rent.

"These mistakes are likely to result in missed opportunities, because either no tender will be submitted or the rent will be tendered too low," says Mr Jones.

But taking extra acres through an FBT or contract farming should not be undertaken at any cost. "Additional land will require more management time and in some cases it may not be appropriate to expand," says Mr Jones.

He is also quick to point out that £150/acre will not be a viable rent on all farms. Lower yielding arable land, permanent pasture and whole farms coming to the rental market will be unlikely to command such a high figure.

Indeed, recent data from Savills put the average arable FBT rent at nearer £90/acre, with stock land making just £65/acre.

But opportunities to expand will arise. "Current low crop prices may prompt the inefficient to put their land out for tender. For those that remain, it will be important to know exactly how much rent they can afford if they are not to miss these opportunities." &#42


Table 1: Taking on more land – costings for an additional 200 acres (£/acre)

Bottom 25%AverageTop 25%

Arable output313320329

Variable costs(96)(90)(87)

Gross margin217230242

Additional fixed costs

Labour(5)(5)(5)

Fuel(12)(12)(12)

Repairs(5)(5)(5)

Interest(12)(12)(12)

Total(34)(34)(34)

Less rent(150)(150)(150)

Extra margin on new land334659


Table 2: Taking on more land – whole farm costing

Existing farmAdditional landExtended farm

1000 acres200 acres1200 acres

££/acre££/acre££/acre

Gross margin 230,00023046,000230276,000230

Fixed costs(186,000) (186)(6,800)(34) (192,800) (161)

Rent00(30,000) (150)(30,000)(25)

Profit44,000449,2004653,20044