Tuesday, December 18, 2018

Better yields and prices deliver higher contract farming returns

June 29, 2018 by  
Filed under News & Business

Higher commodity prices, better yields and lower variable costs saw returns from contract farming agreements rise for both farmers and contractors in 2017, says Strutt & Parker.

Provisional results from the firm’s annual survey of contract farming agreements showed the average net margin for Harvest 2017 was £125/ha higher than the previous year. The survey covers 18,700ha of land mainly in the east of England, East Midlands and south-east England.

Speaking at last month’s Cereals Event, Strutt & Parker’s farming department director Richard Means said total returns to individual farmers averaged some £353/ha in 2017 – around the five-year average – compared to £273/ha in 2016.

Total income to contractors was similar at £367/ha in 2017 compared to £311/ha in 2016 – up from the lows experienced in 2015 and 2016 but still somewhat lower than the 10-year average.

Total returns

Mr Means said: “It is really pleasing to see an upturn in the total returns to both parties, compared with 2016 thanks to higher crops prices and better yields, and all despite a significant area of oilseed rape in the east and south east of England being written off during autumn 2016.

“Another factor was the drop in variable costs which were at their lowest level since 2011 as a result of lower fertiliser costs, reduced fungicide expenditure in the dry 2017 spring and oilseed rape crops being replaced by lower input crops.

“What is also very positive is to see an increase in the divisible surplus, which is the revenue that can be divided between the farmer and contractor after variable costs, fixed costs, the contractor’s charge and farmer’s retention have been deducted from total receipts.

“In 2015, more than half of agreements made a negative divisible surplus, in 2016 this was 39%, but in 2017 this figure was down to 11%. In our mind, a good contract farming agreement is where you make a positive divisible surplus.”

Inventives

A good sustainable agreement set an achievable contractor’s charge and farmer’s first charge, said Mr Means. “Having a positive divisible surplus generates the incentive necessary for the contractor to benefit from the work that they have put in during the year.”

In instances where there was a negative divisible surplus, agreements should be structured so losses are carried entirely by the farmer because this shows they are taking on the risks associated with farming, Mr Means explained.

“We do hear about arrangements where it is agreed that any losses are rolled forward to future years and we think this is potentially quite dangerous as that guarantees a minimum return to the farmer in any one year, which could be seen as a rent.”

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