Don’t just look at commodity prices when reviewing rents

Increasing commodity prices are prompting a wholesale review of rental values in the farming industry.

But, writes George Chichester, a partner at Strutt & Parker, there are many more factors that need to be taken into account when setting agricultural rents.

Farming profits have been relatively depressed for the past decade, and quite rightly farming rents have therefore remained relatively static over that period.

With commodity prices now rising significantly – albeit more so in some sectors than others – there has been a flurry of activity with landlord’s agents serving notices to review rents on Agricultural Holdings Act Tenancies, and with Farm Business Tenancy rents and Contract Farming Agreements similarly being reviewed.

The market place has changed so fast that comparables have been hard to come by, although gradually principles are being established to help assess what is the fair return for each set of circumstances.

Arable sector

The first important point to note is that every farm is different. The main activity has been for arable farms, where profitability has increased significantly, but there are other sectors which are finding life very difficult at present – especially pig farmers.

Even within a sector, the quality of land, buildings and facilities can vary considerably from one farm to another. So, there is no blueprint and each farm must be assessed on its own particular merits.

While the grain prices may have trebled from trough to peak, many input costs – notably feed, fertiliser, fuel and steel – have also increased hugely in price.

The impact of such increases will vary from farm to farm – for example is the land suitable for minimal cultivation rather than the plough, are there more combining days on the soil type concerned to enable more grain to be harvested in dry weather conditions, what is the inherent mineral fertility in the soil and is it in need of regular lime applications.?

The implications of Environmental Stewardship schemes must also be taken into account – a farm with many hedges will need less margins and field corners to satisfy ELS obligations than one which is bare of hedges.

Land value

One cost which is often overlooked is that of the land itself. An investor in property would expect a return of somewhat less than the cost of borrowing if investing in agricultural or residential property (but would expect a higher yield if investing in commercial property) and the actual yield will depend on a number of factors of which only one is the income earning capacity of the land.

However there is a correlation between these two, and when land value rises the dividend needs to increase in the same proportion if yield is to be maintained.

Other property of importance is the dwellings and farm buildings. The rent negotiation process will need to take into account the quality of such buildings and whether they are sufficient for, better than or less than needed for the farming system which a prudent tenant would follow. Where the landlord’s facilities are inadequate and the tenant has invested appropriately for the benefit of the business, then due regard should be taken of the tenant’s investment.

Questions put forward

The impending new Nitrate Vulnerable Zones obligations will also impact more severely on some farms than others. What will these mean to slurry storage requirements and who will pay for the extra capacity required? Is there sufficient land to maintain current stocking rates? Can the optimum nitrogen requirements of the crop be applied at the optimum timing?

The terms of the tenancy agreement itself will also have a bearing on the appropriate rent. Is the tenant required to live in the farmhouse? Is the tenant able to sub-let surplus buildings or to conduct non-agricultural activities, and if so on what terms? Is the tenant obliged to maintain a particular system of farming – for example dairy farming?

There is no one-size-fits-all. Careful thought and analysis must be given to the due circumstances, and this nearly always requires outside professional advice. Arbitration should be avoided wherever possible. But, whatever is eventually agreed will then stand for three years – so it is worth getting it right!