The latest maket Intelligence report from SmithsGore looks at agricultural rents to year end April 2014.

Rents rise by an average of 28%

Our surveyors continue to be busy conducting agricultural rent reviews. Rents for all tenancy types rose by an average of 28% for reviews and new lettings in the year ending 30 April 2014. Rents for existing tenancies rose by 24% at review, compared with 25% for the year ending 30 April 2013. If we calculate an annual change by looking at rents that were reviewed both this year and three years ago, they have risen by an average of 25%, which is equivalent to 8% per year.

Whilst commodity prices have softened recently, strong demand for land to rent continues and multiple bids at or around the same level are often received for land offered by tender.

The average FBT rents in this report are below some of the rents that grab the headlines. This reflects the diversity of holdings and land, and that many landlords consider factors as well as rent when selecting tenants, such as the tenant’s business plan, skills and husbandry.


Average percentage change in year to 30 April (all farm and tenancy types). Includes both reviews and new lettings

Key points

• Arable FBT rents are the highest, both in terms of % increase and in £ per acre
• Rents for higher quality soil continue to increase most
• Scottish rents have increased at their fastest rate since 2008

Growth by Farm Type

2014 Highest rises in the arable sector

Rents increased by an average of 24% which is slightly lower than the 25% average for reviews conducted in 2013, but consistent with the three-year average of 24% between 2011 and 2014.

Arable and livestock rents continue to increase the most. Arable rents rose by 28%, down from 33% in 2013; livestock rents rose by 25%, down from 27%. Dairy rents increased by 19%, up from 16% in 2013.

These figures are averages and, as stated before, there is considerable variation around the averages.

Growth by tenancy type

2014 FBTs continue to show greatest rises.

FBT3 rents rose by 32% compared with 19% for AHA and 18% for Scottish tenancies. This is because rent review clauses in FBTs allow rents to be revised to current open market levels while AHA and many Scottish tenancies have a less open market nature.

The 18% average increase for Scottish tenancies is the highest since 2008, when the figure was 19%.


Growth by Region and Farm Type

2014 East Midlands and Yorkshire rents rise 34%. Rents have risen in all regions and, as in 2013, they have increased the most in the East Midlands and Yorkshire and Eastern England. There has also been strong rental growth in Western England and Wales, particularly on livestock farms.

2014 Strong rental uplift for all farm types. SmithGore let over 8,500 acres on new FBTs in the year to 30 April 2014. The average letting size was 130 acres. The arable lettings averaged 125 acres, whilst livestock lettings averaged 78 acres, and mixed lettings averaged 135 acres. 19% of the lettings were over 200 acres, and there were 11 equipped farms let.

Rents for new FBTs are 54% higher on average than they were under the previous letting of the holding.

There is considerable variation around the averages, for example, arable FBTs averaged £154 per acre in the year to 30 April 2014, whilst the top 14% of arable rents were bare land and over £200 per acre.

2011 - 2014

Rents have risen by 60% on average in the three years to 30 April 2014. Livestock rents are lowest per acre, whilst arable rents are the highest. New FBT rents have risen in all regions. Rents have risen most in the East Midlands and Yorkshire. Average rents for new lettings are highest in Eastern England and lowest in Northern England, where there is a higher proportion of livestock lettings.

English & Welsh view

Nearing the top?
 
The level of activity on rent reviews seems to continue unabated and the headline figures of rent increases suggest that the bull run of rents has lost little, if any, of its momentum. The rate of increase for both AHA and FBT rents remains almost unchanged from the previous report. However, behind the headlines, there are now perhaps the first signs that caution about output prices is beginning to manifest itself in the rents being agreed by our teams across the country.

During 2014 Smiths Gore has been involved in letting substantial areas of farm land for estates in most parts of England, over 6,000 acres has been advertised nationally including some of the largest blocks of land to come on the open market for some time. The results of these tenders have been to achieve some significant rent increases for the land owners and to provide successful farming businesses with much needed land for expansion and development. However, we are now beginning to detect that some bidders are “thinking twice” before adding that extra £20 or £30 per acre to be sure of coming out on top. Others, perhaps expecting to be out-bid by neighbours, may decide not to submit a tender at all, reducing the amount of competition for land. That said, the demand for land in many areas remains robust and rents in excess of £200 per acre for average land let by tender are not uncommon.

On average, the rents for newly granted Farm Business Tenancies are continuing to increase faster than those settled under continuing tenancies (54% compared with 32%) and those under AHA tenancies (19%). There are some signs of a plateau being reached, certainly in terms of the strength and depth of open market tenders in some areas. However, rent increases negotiated freely between landlords and tenants of both AHA and FBT tenancies continue to show the underlying strength of the rental market. It is much too early to say that the era of rent increases is over, but perhaps a period of consolidation lies ahead.


Scottish view

Falling supply, challenges and unforeseen circumstances - plenty to discuss

Two overriding messages come out of our latest report on agricultural rents in Scotland - rental levels overall are significantly lower than those south of the border and there is virtually no supply of land for new letting. Indeed the amount of land being let generally continues to fall. It is interesting to speculate on the reasons but one of the key reasons must be to some extent influenced by the shortage of market evidence. If owners had clear evidence of the rental value of land this may encourage more to make land available.
The industry generally seems to have now accepted that the sterile position of so many past decades has simply got to change and we all wait with great interest the outcome of the latest tenancy review process led by Andrew Thin. Of course they will only be making recommendations to the government but let us at least hope for an outcome that creates a positive outcome for Scottish agricultural production.

The results set out in this report predate the judgement of the Land Court in the recent Elliot v Roxburghe Estates rental dispute in the Borders. Everyone involved with the tenancy sector has taken note of this case as it has significance. The impact of the recent Land Court findings will however be tempered possibly by the continuing uncertainty created by the new Basic Payment Scheme now being implemented.
 
No doubt the impact of the new scheme will become clearer with time but at present it raises more questions than answers. There are certainly going to be losers, predominantly arable and smaller intensive livestock producers, but there will also be winners with some in the marginal uplands sensibly receiving significantly greater support.
These changes will gradually feed into the rental sector, masked by the prolonged transitional arrangements. Finally looking ahead there are potential price challenges for many producers to address, along with the possibility of more expensive money, and I haven’t even mentioned the outfall from the Independence vote process. But there can be no doubt that whatever the outcome the only thing that you can be sure of is that there will be unforeseen consequences. As ever there is plenty to discuss over the kitchen table and not just at rent review time.  


The Outlook for 2015 and 2016

Arable

There were generally good yields for cereal crops at harvest 2014 and there have been good seedbed conditions for the establishment of new crops. Commodity prices have fallen for most crops as world supply remains high having not been adversely affected by any serious weather or production problems. For example, wheat prices have fallen by over £100 per tonne in the last 18 months from their peak. Forward prices for harvest 2015 are higher but it is the scarcity of land available to rent coupled with high demand for it that will remain the main driving factor for open market rents. We continue to expect high rental tenders for new tenancies. Rent reviews should be carefully considered on a farm-by-farm basis as the opportunity for growth is mixed.  

Beef and sheep

Beef prices have fallen due to lower consumer demand, which has resulted in an oversupply of beef on the market, with cheaper imports having also added to the downward price pressure. Feed price reductions and good grass production have both however allowed feed costs to be reduced. Lower beef supply in 2015 could strengthen sale prices but, unless the current rental level is at a low base, then scope for growth at review may not be as great as it has been in the recent past.

Dairy

High milk output coupled with reduced demand has led to both UK and world milk prices falling. As for beef and sheep, lower feed costs will help to reduce the impact of lower milk prices on profitability. Despite this, well-equipped units to rent are still relatively rare and this means that tender rents remain strong for dairy farms. Rents at review could see an uplift but generally only if the unit has good facilities and a low capital investment requirement.

Pigs and poultry

This sector is likely to benefit the most from falling cereal prices. However finished pig prices have dropped when compared with a year ago and broiler prices have also fallen. UK producers are supplying more to meet domestic demand and investment in the industry is being maintained. Again reviews need to be considered carefully on a case-by-case basis.

About the agricultural rent survey

This report provides details of average rents agreed at rent reviews, re-lettings and new lettings in:
(i) 2014: the 12 months to 30 April 2014 (478 rent settlements covering 108,000 acres)
(ii) 2011 – 2014: the 36 months to 30 April 2014 (1,835 rent settlements covering 468,000 acres)

The complete database now contains details of over 3,000 rent settlements, covering over 875,000 acres of land in England, Scotland and Wales with a rent roll in excess of £48 million per annum. It is one of the most
comprehensive databases available in Great Britain.

Average rents. Please note that the rents shown are averages and that there can be considerable variation either side of the average depending on the location and quality of the holding and its fixed equipment. Some rents have dropped, usually when properties are taken out of the tenancy agreement, and others increased by well over 100%. This analysis focuses on what might therefore be described as trends.