Better outlook for arable contract farming in 2014

Arable contract farming budgets show an improved outlook for the 2014 harvest.

The forecast for 39 agreements managed by Brown & Co show total returns to the farmer of £470/ha while contractors are set to bring in a total return of £447/ha.

These are mainly producing combinable crops on medium-bodied Grade 3 land, with sugar beet grown on about 10% of the acreage.

The improved outlook follows a drop in total returns of about 12% to both contractor and farmer in the 2013 results (see table).

Arable sales for the 2013 harvest year fell by 8% to £1,453/ha compared with the previous year, reflecting the difficult weather of the season.

See also So you want to…use a contract farming agreement

The very wet autumn and winter resulted in a 10% fall in winter cropping and a corresponding increase in less profitable spring crops, said Brown & Co consultant Guy Plenderleith.

“Plenty of sunshine later in the season helped wheat yields and quality hold up well, but lower grain and oilseed rape prices undermined returns,” he said.

“Variable costs fell just 3% – very costly slug control and increasingly expensive blackgrass control were significant factors outweighing any savings from a switch to spring cropping and lack of disease.”

The overall return fell 12% to £853/ha for the 39 agreements finalised so far for the 2013 results. The survey covers 6,500ha, mostly in East Anglia, with Brown & Co working for the farmer in these agreements.

The contractor’s charge for establishing, growing and harvesting those crops and the farmer’s retention remained virtually unchanged from previous years. This left a divisible surplus of £313/ha, a 28% drop on 2012.

This was split 47:53 (weighted average tier split across all agreements) between farmer and contractor. Overall the farmer received a total return of £437/ha and the contractor £416/ha.

Budgeted figures for 2014 show total income rising to £1,551/ha, with yields back to trend of 8.74t/ha for feed wheat and 3.75t/ha for oilseed rape.

Allowing for slightly higher variable costs and overheads, farmer and contactor could expect to receive £470/ha and £447/ha respectively from the 2014 harvest year, said Mr Plenderleith.

However, the budget has an oilseed rape selling price of £320/t, which looked optimistic, he said. Revising it down £30/t to current levels would shave about £10/ha off each partner’s returns.

Getting the structure and balance of agreements correct from the outset was key to avoiding problems later on, said Mr Plenderleith.

Agreements needed to ensure terms produced a fair share to both parties, regardless of season, yield or price. The only guaranteed payment was the first charge to the contractor.

Many historical agreements were skewed in favour of one partner or the other, and needed reviewing, he said.

“The key thing is to strive for fair returns not only in good years, but difficult ones too, by having a well-constructed agreement with the correct tiers in place when it comes to sharing the surplus,” said Mr Plenderleith.

“As a rule of thumb, aim for a contractor’s first charge of about £250/ha, and a farmer’s first charge being the single farm payment plus £100-110/ha – typically about £300/ha or so.

“In a typical combinable crop/sugar beet scenario the divisible surplus could then be split 50:50 for the first £300/ha, at which point the contractor will be receiving about £400/ha. Anything above that should then favour the farmer, typically being divided 70:30.”

Splits after the first tier typically offered anything up to 80% to the farmer. In many cases, this top slice did not come into play in 2013, but was forecast to – just – in 2014, said Mr Plenderleith.

It was important to ensure the majority of windfall profits from high commodity prices, which were out of the contractor’s control, went to the farmer, helping to safeguard reinvestment.