Anyone who wants to rent farmland today will have to pay a lot more than they would have two years ago. Rural land rents are rising and, although it might seem odd, farmers are not entirely unhappy about it.
Why should tenant farmers be relaxed about paying more for their land? Well, although they may not actually like stumping up more rent in itself, that rent is based on their income, which has gone up in the past couple of years because of rising commodity prices. Farmers are getting more for wheat and meat so, generally, they do not mind paying a little more for the land they farm.
The rent rises can be dramatic. Smiths Gore’s statistics show rents increased by an average of 24% in the year to 25 March for both arable and livestock land, with dairy up 19% and mixed-use land up 20%. In absolute terms, this means that an arable farmer previously paying £83 per acre pa will now pay £99, and a livestock farmer previously paying £36 per acre pa will now pay £47.
For the typical farm, says Smiths Gore, this means a total increase in rent of £3,100 pa, from £16,400 to £19,500. This equates to just under £10,000 over a three-year rent review cycle.
The justification is straightforward. Wheat prices, for example, have risen from £85 a tonne two years ago to up to £200 a tonne this year.
That is why any suggestion that landlords might be profiteering tends to be dismissed by those managing rural land, even if farmers still have to argue their case firmly (see panel).
Dr Jason Beedell, Smiths Gore’s head of research, says: “Rural rents have always been linked to profitability, and my view is certainly that landlords are not profiteering at all. Typically, the income from farmland is less than 2% a year.”
But this does not mean that setting a rent level is simply a matter of linking the price the farmer gets for his produce to the amount he pays the landowner. This is because of the volatility of commodity prices. So although wheat prices have hit £200 a tonne at times this year, they have veered between that and £150 a tonne. Like oil, agricultural products vary in price from week to week, so linking earnings to rent can be complicated.
Beedell says there is also a general acknowledgement that “there is a little bit of a commodities spike”, which farmers can legitimately use as part of their argument in setting a fair rent.
Graeme Bruce, partner in charge of the Alnwick office of Youngs chartered surveyors, also agrees that in rural rent reviews, “volatility is often the issue”.
Scarcity of land is another factor that is helping to keep agricultural rents healthy, says Bruce. “There is not enough land to satisfy demand. Farmers are keen to take on more land so they can mitigate their fixed costs. Nowadays, you need more land to make a reasonable living.”
Rising input costs
David Hebditch, head of Chesterton Humberts’ rural division, agrees that the relationship between fixed costs and taking on more land is an important factor. “While commodity prices have increased, farming businesses must be wary of rising input costs, including fuel and fertiliser costs, which are reaching record highs,” he says.
“In the case of farm business tenancies, there is evidence of large farming businesses being prepared to pay strong rents to enable the business to spread its fixed costs over much greater acreage.”
Another reason for farmers’ willingness to pay more in rent and their enthusiasm for acquiring greater acreage is the upbeat feeling that higher commodity prices have inspired.
Rob Hughes, partner in property and business consultancy at Brown & Co, says: “Higher output prices, driven by the wheat price, have led to a significant air of optimism. Farm business tenancy rents have increased very substantially and are 30-40% higher than two to three years ago.”
The question of whether the spike in commodity prices is just that – a spike – or part of a permanent change in the financial structure of farming (and therefore rents), is a crucial one.
What is more, it is not just an issue for farmers or agricultural landlords, but also has implications for everybody, because we all use the food chain at some point, even if it is just taking food off supermarket shelves.
Nick Tapp, head of agribusiness at Bidwells, points out that the second rapid increase in food costs in three years has highlighted issues such as “global food security, peak population and finite resources”, all of which should work together to keep prices high.
And keeping prices high is, in the end, probably what both landlords and farmers want. Why? Because the farmers get a better return on their produce and the landlords can justify charging more rent. Another question, of course, is how much the rest of us are prepared to pay for a pint of milk, a loaf of bread or a leg of lamb. It does not look like they are going to get any cheaper.
Land prices break the £20,000 per hectare barrier
It is not just farm rents that have been rising sharply in the past year. Land costs have been going up, too.
Smiths Gore says that the average price of land in England broke the £20,000 per ha barrier for the first time this year.
Prices have risen for seven consecutive quarters, driven partly by the small amount of land that was available to buy last year.
There has been an increase in availability in 2011, mostly in arable farms. Smiths Gore attributes this to “owners cashing in on high commodity prices and sentiment in the sector”.
So have prices peaked? No, says Giles Wordsworth, head of farm agency at Smiths Gore. “Our farmland model suggests prices will continue to rise as the wider UK economy starts to grow again,” he says. “But the main driver of the market remains the balance of demand and supply. Supply has not yet grown enough to satisfy demand from farmers and non-farmers.”
The farmer’s view
However justified rising farm rents might be, it is not surprising that farmers are the ones who are the most keen to keep any increases within reasonable bounds.
Bill Hayward, who farms 1,800 acres and has a further 1,000 acres under contract, in West Sussex, says he has made sure he has solid evidence of his costs at rent reviews.
Hayward uses Landmark Systems software to provide evidence of how much he spends as well as how much he earns. This is something he is convinced has helped to keep rent rises at a more modest level than they might otherwise have been.
“Agents won’t like me saying this, but if you have clear evidence of your costs, they are much less likely to take advantage,” he says.
Hayward is a good example of a farmer whose farmland is part-owned, part-rented and part-contracted. He owns 360 acres himself and rents or contracts the rest, mostly in the A23 corridor surrounding his own land because this cuts costs and makes it easier to manage.
