Farmers can share the risk with AD feedstock deals

Growers need to look beyond price a tonne when deciding whether to sign up to feedstock supply agreements for the expanding biogas sector, according to experts at last week’s Cereals event.

As more crop-based anaerobic digestion plants come into operation across the country, demand for energy crops such as maize and grass silage in particular has risen sharply and pushed prices up. Typical feedstock prices of £28-35/t in many areas of may be enough to tempt growers to sign up to a supply deal, but before doing so it is crucial to consider all contract options, their terms and conditions, plus implications for the farm business.

“Nearly every feedstock supply agreement is different and the terms ultimately depend on what level of risk those involved are prepared to take,” said Alexander Creed from Strutt & Parker.

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AD investors generally wanted security of supply and that meant long-term 10- and, in some cases, 20-year supply agreements, whereas farmers were understandably reluctant to commit land for such periods, he said. However, he suggested there were signs developers were becoming more flexible in their approach and sourcing perhaps 50-60% of feedstock on a 10-year deal from the farm where the plant was located and working with that farmer to secure remaining supplies from neighbours or elsewhere.

See also: Read more from this year’s Cereals event

“That’s a much more enlightened way of working and creates opportunities for other farmers and growers.”

Weigh-up the options

The most straightforward supply agreement is where a grower agrees to supply a given tonnage of feedstock (such as maize silage) at an agreed price. While this may seem straightforward, there are a number of issues to be aware of.

“When considering the price offered, weigh it up against the opportunity cost of not growing other crops on that land,” said Cath Anthony of Bidwells. “Also make sure you’re clear about what that price is based on and be realistic about what yield can be achieved from your land, especially if it’s a crop that hasn’t been grown before.”

She highlighted a number of contract terms to focus on, including:

  • What type and specification of feedstock the price is based on – crop type, dry matter content, other quality criteria?
  • Is the price linked to external factors such as wheat price, inflation, input costs?
  • Is there any tolerance in the tonnage that can be provided above or below the agreed amount? What happens if the contract tonnage cannot be met in the event of a poor harvest?
  • Understand delivery and payment terms, for example, who is responsible for harvest, storage and delivery? How much feedstock will be collected/delivered and when – all at once or spread through the year?
  • What happens in the event of late harvest/delivery? Is there any bonus payment?
  • Is there any compensation available for the impact on following crops? Such as a late, wet maize silage harvest may cause compaction that needs remedial work and could reduce yields of following crops.
  • Check who is responsible for sweeping roads – can be a particular issue with late maize harvests.
  • Is there any option for the grower to switch to another crop during the contract period?
  • Does the contract have a break clause? If so, what are the conditions attached to it?

Share the risk

Other contract types allow growers and AD plant operators/developers to share the risk to varying degrees, said Richard Means of Strutt & Parker.

Aside from a “crop-only” tonnage supply contract, options included letting land to a developer on a cropping licence, he said. That would give the farmer a rental income (about £150-240/acre) and an extra crop in the rotation, while the developer was usually responsible for everything from drilling through to harvest. “But it’s worth noting the landowner is still the single payment claimant and it will be their responsibility to comply with relevant regulations. This can be seen as more risky if the work is being carried out by someone else.”

A tenancy agreement with the developer on land used for growing feedstocks could be a way around that, as the tenant takes on more risk, Mr Means said. “But this can be quite complicated to structure and does not work well when there are stewardship schemes on the same land.”

Contract crop agreements could offer a potential solution by spreading risk more evenly between farmer and AD developer/operator, said Mr Creed. Under such an arrangement, the AD operator rents land from the farmer to grow feedstock on, then pays the farmer to act as a contractor to manage the actual growing of the crop.

This means the AD operator takes on more risk in terms of production costs and yield variations, but could make savings on overall growing costs. The farmer gets the benefits of having another crop in the rotation, plus rental income and payment for the contracting work.