FW Opinion: Farmers should brace for a drop in rent level

Is there to be a long-awaited plunge in land rental values? In this week’s Business section, adviser Gary Markham addresses the difficulties of how current contract-farming agreements will operate in a world without the Basic Payment System.

He notes that removing area payments from a contract-farming agreement brings down the rental equivalent of the land to between £50/ha and £100/ha.

See also: FW Opinion: Weather’s all the talk, if you can find someone

This can be contrasted with the £222/ha average rate paid for farm business tenancies (FBTs) in England in 2019, the most recent data available.

The sector may not see a fall in value of up to 77% by 2028, when area payments are set to be fully phased out, but a significant drop seems highly likely.

Tenants and their advocates have long protested that rental values are too high and encourage short-term behaviour that is detrimental to preserving soil quality.

Stories of someone who has been willing to tender at a punchy price are a staple of farming gossip, with much shaking of heads about how they’ll never make it pay.

Landlords (along with the mostly tweed-wearing advice industry that surrounds them) are quick to publicise a tale of a high rate as evidence that the market is in good health.

It will never be in their interest to publicly talk down the market, but both the data and the talk are definitely pointing in the other direction.

Anecdotally, there are declining numbers of contractors willing to enter into contract-farming agreements, with one farm consultant noting that even five years ago there were significantly more “irrational” actors in the market willing to operate on the thinnest of margins. 

The tipping point has already been reached with FBTs – Defra figures show that the average value in England peaked in 2018 at £231/ha (or £94/acre). This fell by a modest 4% by the following year – which is the most recent data available – to the £222/ha mentioned already.

The reality is that in an open market there is no such thing as a right or fair value – just one that two parties are both willing to enter into, which will always suit some people better than others.

For decades, two factors have suspended land values far above its agricultural capacity – the EU’s CAP and the UK government’s tax regime. These have provided a fixed income that can be derived from land, and a benefit to holding land over other asset classes for inheritance tax benefits.

With area payments being phased out, one leg of that has been kicked away and the other has been subject to a review as the government mulls how to pay for its coronavirus spending spree.

The current system has created a definite set of winners and losers, with landowners clearly the main beneficiaries. A sharp change would adjust the balance, but until its effects ripple out, it’s hard to say how substantially it would change the overall agricultural sector.

What all sides need is more information from Defra and the devolved administrations on the financial value of future environmental schemes and how these will interact with the business of food production.

Defra was embarrassed this week after a Whitehall memo was leaked to The Times castigating the department for having no finalised plans to reduce emissions from farming or to use the countryside to help offset emissions from other sectors.

Winners and losers arising from a long-term policy shift is one thing, but businesses having to make decisions in an information vacuum is a state of affairs that should not persist for a minute longer than it has to.