Farming News - Contract Farming Agreement survey highlights value of joint ventures

Contract Farming Agreement survey highlights value of joint ventures

12 Jun 2019
Frontdesk / Arable / Finance

Higher commodity prices and a favourable exchange rate for the calculation of BPS payments saw arable farming returns from Contract Farming Agreements rise for Harvest 2018, despite lower yields.

Provisional results from Strutt & Parker’s annual survey of Contract Farming Agreements, which covers 19,400ha of land mainly in the East of England, East Midland and South East England, showed the average divisible surplus from agreements for Harvest 2018 was at its highest level for four years.

Speaking at the Cereals Event, Richard Means, director in the farming department of Strutt & Parker, said total returns to the farmer averaged £375/ha in 2018 (£361/ha in 2017).

This is an income which is comparable to the rent they would receive for a three- to five-year Farm Business Tenancy, but they retain control of farming practices and the tax advantages of being a trading business.

Looking back over the past five years, CFAs have also produced profits to the farmer (five-year average of £346/ha) above those achieved by the middle 50% of in-hand farming businesses (£319/ha).

The contractor’s total income was very similar to that of the farmer at £386/ha (£362/ha in 2017).

“Given the challenges of 2018 in terms of the weather, it is very positive to see a rise in the total returns to both parties with improved wheat prices, around £30/t higher year-on-year, offsetting lower than average yields.

“Variable costs for the 2018 crop were very similar to 2017, lower than the five-year average due to a continued shift in rotations towards lower input cost crops, as growers move towards more robust wheat varieties, as well as growing spring barley and spring oats.”

CFAs likely to grow in popularity

Mr Means said he was expecting Contract Farming Agreements to increase in popularity over the next few years due to a combination of factors.

“There will be a need for some farmers to adjust their business structure to adapt to reduced levels of direct subsidy. The core overheads within the industry vary by over £200/ha between the top and bottom quartiles and this difference will not be sustainable with the loss of BPS, as set out in the Agriculture Bill.

“The incentivised nature of CFAs is such that it rewards innovation and better performance, which will be key to maintaining profitable farm businesses in the short- to medium-term.

“We are already seeing that some farmers who require more consistent returns to help service investment in other projects are turning to CFAs as a way of managing rising volatility in farming.”

Mr Means said contracting farmers were still keen to take on more land, but were being strategic about choosing which farms to tender for in terms of their proximity to their own units and whether they had good grain storage facilities.

Over the past five years, contractor’s charges have been on the rise as they seek to lock into higher guaranteed returns and ensure that the farmer bears a greater proportion of the risk from market volatility.

Strutt & Parker Harvest 2018 provisional CFA results (combinable crops agreements only) – A summary

  • Total receipts from crops sales, BPS and stewardship payments 2% higher than in 2017 at £1,259/ha, due to higher commodity prices.
  • Average variable costs (£401/ha) similar to 2017 and below five-year average
  • Fixed costs down at £100/ha.
  • Contractor’s charge broadly similar to 2017 at £272/ha, leaving a net margin of £482/ha.
  • Farmer’s retention £270/ha (£277/ha in 2017), leaving an average divisible surplus of £212/ha (£173/ha in 2017).
  • Total returns to the farmer averaged £375/ha (£361/ha in 2017), which is well above the five-year average, but there is wide variation.
  • Contractor’s total income was £386/ha (£362/ha in 2017), which is above the five-year average

 Strutt & Parker Harvest 2018 provisional CFA results (agreements including root crops) – A summary

  • Total receipts from crops sales, BPS and stewardship payments similar to 2017 at £1,337/ha and around the five-year average.
  • Average variable costs up from £393/ha in 2017 to £443/ha in 2018.
  • Fixed costs £171/ha (£140/ha in 2017).
  • Contractor’s charge at £253/ha (£245/ha in 2017), leaving a net margin of £471/ha.
  • Farmer’s retention £293/ha (£261/ha in 2017), leaving an average divisible surplus of £177/ha.
  • Total returns to the farmer averaged £390/ha (£408/ha in 2017).
  • Contractor’s total income was £354/ha (£400/ha in 2017).

 2018 detailed results

Figure 1:  Receipts, costs and income to Farmer and Contractor from arable agreements

(excluding agreements with root crops)

Annual averages[1]

(£/ha unless otherwise stated)

2009

2010

2011

2012

2013

2014

2015

2016

2017 final

2018 prov

Number of CFAs

27

27

26

51

37

42

37

49

56

57

Area (ha)

4,424

4,469

4,123

9,470

6,350

6,495

6,294

8,973

11,902

12,685

 

 

 

 

 

 

 

 

 

 

 

Receipts

£1,078

£1,300

£1,441

£1,483

£1,342

£1,389

£1,104

£1,101

£1,232

£1,259

Variable costs

£401

£350

£382

£486

£482

£492

£459

£416

£398

£401

Fixed costs

£82

£94

£88

£96

£94

£101

£94

£104

£116

£100

Contractor's charge

£226

£230

£243

£242

£262

£264

£275

£265

£266

£272

Net margin

£368

£627

£727

£658

£503

£532

£276

£316

£451

£482

 

 

 

 

 

 

 

 

 

 

 

Farmer's retention

£219

£234

£235

£258

£281

£274

£280

£247

£277

£270

 

 

 

 

 

 

 

 

 

 

 

Divisible surplus

£174

£393

£512

£401

£235

£258

-£4

£68

£173

£212

% of agreements making a

negative divisible surplus

0%

0%

0%

0%

9%

14%

51%

39%

5%

14%

First split to farmer (%)[2]

28%

30%

33%

33%

37%

42%

48%

42%

44%

44%

First split to contractor (%)

72%

70%

67%

67%

63%

58%

52%

58%

56%

56%

 

 

 

 

 

 

 

 

 

 

 

Income to farmer

£307

£435

£484

£466

£409

£414

£271

£273

£361

£375

Income to contractor

£317

£453

£517

£464

£385

£412

£309

£311

£362

£386

Income to farmer (%)

48%

49%

49%

50%

51%

45%

42%

46%

50%

48%

Income to contractor (%)

52%

51%

51%

50%

49%

55%

58%

54%

50%

52%

[1]  The figures shown in the tables are the average for all of the CFAs for each measure, such as variable costs.  This method produces figures that are the most reflective of reality but they do not ‘sum’ precisely (i.e., receipts less costs does not precisely equal net margin), which would involve ‘summing’ the average of averages, and that can produce an unrealistic figure which is misleading.

[2]  NB These figures exclude agreements where there is a negative divisible surplus as, due to the way agreements are structured, the farmer bears all of a negative divisible surplus, so the first split changes to 100% to the farmer.