Contractors and tenants are concerned about the rising costs of inputs and falling commodity prices. Landlords and landowners want to see improvement in returns following a long period of static rents and returns from contracting agreements.
While the short-term position is becoming increasingly difficult to forecast, both parties need to consider the risk and rewards they take, and how they might manage these for their mutual benefit.
Two aspects are:
Improving risk management of sales and purchases helps to iron out the high or low of the market on the day. Selling a proportion of grain using a combination of sales pools and forward sales to lock into prices that will cover rents or contractors’ costs is one way of managing this risk. While it may not hit the highs, it will avoid missing the market. How many farmers regretted selling early last year and not selling earlier this year, having taken the gamble that prices would remain high? Also becoming common are supply contracts that offer less volatile pricing structures in return for regular production of commodities such as milling wheat and beef.
Managing purchase price risk can be more difficult but forward planning of cropping, selection and purchase of seeds, fertiliser and sprays, where possible, gives time to find the right price. Purchasing through buying groups is also an effective way of mitigating input price risk.
An increasingly popular option is to structure agreements on farm business tenancies or contracting arrangements to help flatten the increasingly extreme ranges of pain and gain that agricultural businesses are experiencing.
A basic rent with a bonus to the landlord, pegged to agreed commodity prices and trigger dates, is a way of spreading the risk between parties. For landlords willing to take more risk there is always the option of pegging rents directly to a commodity price on a set date. However structured, it is important that the outcome can be easily calculated and verified by both parties to avoid arguments later.
For those in contracting agreements there is scope for a range of options. Multi tiers of divisible surplus shares enable both parties to share in exceptional years, without disadvantaging contractors in poorer times. Concepts such as fuel price multipliers on contracting charges can also spread some of the burden between contractor and landowner in an equitable way. With careful thought about terms and business planning, both parties may cushion themselves against these volatile times.
For further information contact David Kinnersley on 01295 226294 email david.kinnersley@fishergerman.co.uk
