Improved cereal prices make contract farming agreements more profitable

Contract farming agreements were significantly more profitable last year following improved cereals prices, according to agribusiness consultant Bidwells.

Drawn from accounts covering 26,000ha (64,000 acres) of contract–farmed land managed by Bidwells and based on the 2006 harvest year, Bidwells’ figures at 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 include 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.

‘Spiralling energy costs’

“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 and a significant number of agreements were revised before the 2006 harvest year to reflect contractors’ higher labour and machinery costs, he added.

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 re-assess 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.

Significant benefits

Despite the improvement in the profitability of contract farming operations, Mr Cousins doubted whether many new agreements would be set up as a result. However, contract farming agreements could offer significant benefits by bringing two parties together, he added.

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

However, 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 added.

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