Farmers are paying too much in rent for land and not taking costs into account, warns Andersons.
The farm business consultant is advising farmers not to fall into the trap of bidding for more land without being sure the business can afford it.
Cereals profits have been higher in the past couple of seasons, with 2011 profits the best for more than a decade. Andersons’ model farm, Loam Farm (See Business, px30), made a profit in 2010 and 2011, even before subsidies. This improvement is reflected nationwide, causing a considerable rise in rents.
Historically, as crop prices increase, rents naturally follow suit, but the traditional benchmarks are outpaced in current values, said Andersons. The rule of thumb over many years has been that rents under a traditional tenancy (AHA) should be about half to three-quarters of a tonne of wheat. At £150t, this would equate to £75-115/acre and £115-150/acre for shorter-term arrangements (FBTs), which traditionally average about three-quarters to a tonne.
However, in the past 12 to 18 months, Andersons has seen examples of rents for short-term lettings exceeding £200/acre, which not only is above the long-term norm, but could also be problematic because of the current high cost of production.
But how much is too much?
“What is too much for one could be manageable for someone else,” said Richard King, partner and head of business research.
“Where people most fall down is basing decisions on a ‘best-case scenario’ rather than presuming that not everything will go right. It’s only ever a good proposition if you make money. The key is to work out what you can afford to pay, set a limit and stick to it.”
There is strength in knowing when not to bid, said Mr King.
“Sometimes you just have to be prepared to let land go.”
Linking rents and output prices
Linking rents to output prices ignores the fact that a proportion of the higher prices can disappear in costs, Andersons said, and care must be taken to not fall into a number of traps.
- Think about the individual profitability of your own business before bidding for land. Don’t assume the land market is rational and current rent levels will always allow for a profit to be made.
- Draw up a budget to assess the most affordable rent and take into account a range of scenarios, such as cost fluctuation and rotational changes.
- Consider possible changes to subsidies. CAP reform is likely to be implemented within the lifespan of many agreements being negotiated now, and support payments could reduce before any effects of the weakening of the euro on the SPS are factored in.
- When deciding whether to take on more land, be aware that both variable costs and overheads will increase. Many of the so-called fixed costs – for example fuel, repairs, depreciation and overtime payments – do increase with extra land and it is very common for the next combine purchased to be just that bit bigger to cope with the extra area, negating any scale economies.
- Think carefully about the extra working capital required by extra land, particularly where rent, seeds and fertiliser is paid for 12 months before the sale of any crop.
- Don’t be tempted to pay uneconomic rents as a means of “getting a foot in the door”, as implementing such a high-risk strategy often leads to farming land at a loss for three years before it is passed on to someone else.
Andersons stresses that the key message for all participants in the land rental market is to be clear about the sustainability of the arrangements to all parties.
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