Will we see an increase in FBT’s if support payments are capped?
The reform of the CAP in 2005 allowed freedom of cropping/stocking and removed the years of headage and quota payments but inadvertently, created little incentive for landowners to let land under formal tenancies for any duration of time. Allied to the incentive of roll over relief for those selling development land and 100% inheritance tax relief (either BPR or APR), there has been a significant shift away from Farm Business Tenancies (FBT’s) to contract/share Farming Agreements (CFA’s).
CFA’s which run well are all about a working partnership with mutual respect for both parties roles within the agreement. We find that at the end of the day, the returns create an even balance and split of the profits with neither one party seen to be the better off. This balance is so often lost with formal tenancies when rents are reviewed at various intervals and in reality, just depends on the price of wheat/livestock at that moment in time. Tenancies have never really been able to react as market forces react on a year to year basis and there isn’t really an approach that considers yields, prices and inputs as much as a contract agreement does.
We’ve also found that once the contract agreement is operational, very few see changes in contractors and that’s down to the better working relationship between all. Of course, CFA’s come with more hassle and management and income only at the end of the trading year as opposed to regular intervals, but as we move forward in more uncertain support payment times, relationships between owner and contractor/farmer are more and more important. Also remember that CFA’s aren’t difficult to run, so don’t get carried away with management fees charged by some consultants who often see them as a gravy train.
We’ve seen a significant increase in contract agreements recently, particularly in the livestock sector; it’s more challenging as we have stock ownership to consider but I think it’s in part a recognition that the economies of scale in the cattle and sheep sector can drive significant cost savings and increased outputs, leading to more direct income to the farmer by use of a contract/share farming agreement.
Having said all of that, I anticipate that we are likely to see landowners considering, once again, letting land back out under tenancies in order to avoid potential capping on future support payments. Given that, I suspect many rely on this income to manage/prop up the estate, therefore it would seem more logical to let the land back out and allow the smaller tenants to expand a little and just receive the subsidy through rent rather than be capped. I do think though that landlord and tenant need to find a more fair basis of rent that reflect what is actually happening on the ground in that harvest year.
Finally, if you’re not aware, please take careful note of the major changes with EFA’s announced this week; the impact particularly on using pulses for EFA areas is great and may require some careful cropping plan adjustments.
Louis Fell, Partner