IF LANDOWNER FARMERS ARE TO TAKE MORE OF THE RISK, THEY DESERVE MORE OF THE REWARD
Published 3 August 2021
This is traditionally the time of year when thoughts turn to whole farm contracting arrangements, and with the agricultural show season somewhat truncated (although it was good to see ‘Cereals’ taking place), and harvest looking like being slightly late this year, there has been plenty of time to ponder what is a particularly thorny dilemma this year.
Landowners and contractors alike are facing something of a perfect storm. Just as the cushion of the Basic Payment Scheme is being whipped out from under farming, the costs of employing staff, agricultural machinery and other inputs are soaring.
It is many years since we have faced such an acute labour shortage, which is pushing up wage expectations amongst agricultural workers. Alongside this, machinery costs have risen 40 per cent in the last decade, and a whopping 8 per cent in the last 12 months alone (driven by Brexit and other supply issues, as well as the need to embrace new technology).
So not only is the cake going to be smaller this year, but the ingredients are costing more. So where is the margin to satisfy both parties going to come from?
In the short term, this issue is being slightly disguised by continued high commodity prices, especially for cereals. (This effect is being heightened by horrendous weather events in Germany and the US; we should not take any comfort from this, because there but for the grace of God…).
Those strong prices will certainly help this year, but given that the average contracting cycle is three years, what happens next year or the year after if there is a price correction – you can be sure that input costs won’t fall.
Landowners will continue to expect a decent return on their investment, especially as agricultural land values continue to rise. If returns fall below a reasonable level, the temptation to cash in on capital values could be overwhelming.
Traditionally some contractors have priced their work at below cost price, confident that they will be able to make their margin through subsequent sharing of profits on the operation. If those profits are being squeezed – and they are – landowner farmers should expect more realistic quotes this time around, which may be a shock to some.
The risk will increasingly fall more on the landowner, but should this be coupled with an increase in their share of the divisible surplus? Contractors are justified in asking for contracts to reflect their increasing costs and smaller profit-share potential – no landowner can expect their contractor to operate at a loss.
In the short-term this might be eased by healthy grain prices, but landowners cannot allow themselves to be bamboozled by what might be a short-term healthy marketplace. There is no doubt that the contracting round will be tough this year; if contractors want contracting charges guaranteed at full rate their expectations from the surplus may have to be tempered. Whilst landowner farmers may see the output diminish, they must have the opportunity to reap a healthy percentage from the final surplus.
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