Revised rental agreements spell good news for tenants
PLUNGING farm income has prompted a leading farm management company to revamp its agreements with landowners by linking land rents to farming profit.
It is not just big companies which stand to gain – tenants using FBTs could benefit too, says Broadoak Farmings Malcolm McAllister.
Fixed rents, agreed every three years, mean those farming the land can lose heavily when profits dive, while landlords remain unscathed.
Figures for a typical 405ha (1000-acre) grade 3 arable farm show how much tenants income has fallen. "From 1992-96, it roughly matched rent payments, so each party was getting an equal share (see table)." In 1997, profit before rent and interest crashed 43%. The landlord collected £89/acre in rent, while the tenant made just £11/acre operating profit.
This years profit represents less than 7% return on investment. "We are now structuring a lot of our agreements to take account of external influences – those which are beyond the farmers control.
"Such a system ought to be built into ordinary rental agreements too. Getting landlords to take a rent cut while increasing share of the profits (including windfall "superprofits") would ensure a more equal split, he notes. *
Year profit before rent operating
rent and profit
1992 97 56 41
1993 121 57 64
1994 129 64 65
1995 172 72 100
1996 176 85 91
1997 100 89 11
1998* 131 93 38
Windfall profits may be a way off. Broadoak budgets for the 12,145ha (30,000 acres) it farms in the UK suggest similar results this season compared with 1997. Yields are forecast to climb due to new fungicide chemistry and a better harvest, and fertiliser and spray costs are expected to fall by about 10%. But fixed costs are expected to rise about 9%.
At a predicted £75/t, the 8.47t/ha (3.43t/acre) wheat crop should produce a gross margin of £635/ha (£257/acre). Deducting fixed costs of £331/ha (£134/acre) leaves a profit of £304/ha (£123/acre).
Gross margins for oilseed rape yielding 3.12t/ha (1.29t/acre) are put at £684t/ha (£277/acre), equating to a profit of £352/ha (£143/acre). The dairy budget suggests a margin over purchased feed of £1410 a cow, using an optimistic milk price of 19.64p/litre at a yield of 9779 litres a cow.