Analysis: 2016 sees further fall in contract farming returns

The most challenging year for arable profitability in a decade – this is Bidwells’ verdict on the 2016 harvest year in its annual analysis of contract farming results.

The data is drawn from about 17,000ha of land on 80 farms across England where arable farming is the main enterprise.  

It shows net profit on these farms falling for the fifth year running and returns to both contractor and farmer falling for the fourth year running.

Total income from cropping fell by almost £100/ha compared with 2015 to £1,093/ha.  

See also: NAAC farm contractor charges 2017-18

Significant falls in income from barley, oilseed rape, pulses (and sugar beet, on some farms) were only partially compensated by the 16.5% jump in the value of the basic payment as a result of the fall in sterling after the vote to leave the EU.

This meant the share of total income represented by BPS cash rose to 19.3% in 2016, up from 15.4% in 2015.

Gross margins

Small reductions in average variable costs were not enough to stop overall gross margin slipping to £690/ha (£742 in 2015). Some of the variable costs savings were attributable to the increased take-up of variable-rate technology, allowing more precise targeting of inputs, said agribusiness partner Ian Ashbridge.

The average contractor’s charge fell £40/ha on the year to a level more consistent with 2011-12 results.

This perhaps indicated deals being agreed in 2013-14 when contractors expected to share in a higher proportion of profits due to higher crop prices, said the report, with these fees being reviewed this summer and autumn.

The farmer’s and contractor’s total returns had moved closer together in recent years, suggesting profits were being divided more equally – a more sustainable approach in times when farm profits are under immense pressure.  

With the average size of farm in the sample at 230-240ha, this suggested in-hand farming became much harder to achieve profitably without the use of unpaid family labour on farms smaller than this, said Mr Ashbridge.

“These smaller farms are often inherently less commercial and have a wider range of profitability from one year to the next because of the effects of markets and production risk.

“While the 2016 results in our analysis demonstrate that larger and more commercial farms are able to weather the storm better, it may be that alternative structures such as share farming deserve greater attention, particularly for smaller farms.”

Contract farming results

Summary of results

2015

2016

2016 – farms above average area in sample (243ha)

 

(£/ha)

(£/acre)

(£/ha)

(£/acre)

(£/ha)

(£/acre)

Total income

1,194

483

1,093

442

1,296

525

Total variable costs

452

183

424

172

445

180

Overheads (including contractor’s charge)

372

151

376

152

437

177

Net profit

370

150

293

119

414

168

Farmer’s total return

307

125

260

105

325

132

Contractor’s total return

333

135

303

123

373

151

Source: Bidwells

What advantages do larger farms have?

Further analysis of farms in the Bidwells sample points to the advantages of operating at above-average scale.

  • The larger or more commercial farms in the sample significantly outperform the average, maintaining net profit in 2016 close to 2015 levels, with some managing a small increase.
  • Average return to the farmer (first charge and profit share) in this set was £325/ha, up about £9/ha on the year.
  • Contractors’ returns in this set rose £23/ha to £373/ha – this suggested the first tier of profit split on such agreements was in favour of the contractor, common in many agreements.
  • These farms earned a slightly higher income from the 2016 harvest year than in 2015, suggesting they delayed crop marketing until much later in the season, probably a reflection of greater or more flexible storage facilities.
  • They spent about £23/ha more than the average on variable costs, probably reflecting a greater willingness or ability to invest in the crop in a higher-disease-pressure season, leading to greater pesticide use.
  • Nevertheless, net margin remained very similar to 2015 at £414/ha, reflecting a level of resilience amongst these businesses that smaller farms may not be able to enjoy.
  • The larger, more commercial farms continue to invest, whether in storage, agronomy, soil nutrient analysis, repairs and improvements to drainage and ditches, or other infrastructure.
  • Larger farms are able to support a greater variety of crops and over wider areas, reducing both market and production risk.
  •  Farms that constitute a more commercial opportunity for both parties in contract farming agreements strike a better balance in that joint venture approach between the farmer and the contractor.
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