Returns from Contract Farming Agreements rise for harvest 2018

Total returns to the farmer averaged £375/ha in 2018
Total returns to the farmer averaged £375/ha in 2018

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 last year showed the average divisible surplus from agreements for harvest 2018 was at its highest level for four years.

It shows total returns to the farmer averaged £375/ha in 2018, compared to £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.

The results are according to 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,

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).

Speaking at the Cereals Event, Richard Means, director in the farming department of Strutt & Parker, said 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,” he said.

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,” he said.

“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.”

Mr Means added: “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.”

He 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.

Results 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.

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.