AHA Rents, DFRA “Farming is Changing” and "No Deal" Brexit

Austin7

Member
To Rent Review or not to Review, the only question can be when to go for the reduction.

An AHA 86 rent is based on a number of factors; primarily productive capacity and related earning capacity. It has been a good harvest but the wheat price has dropped £50 per ton since last year, looking forward there is nothing to indicate any recovery. With the weak pound costs will increase regardless of any possible additional tariffs imposed in a no deal scenario. In this case Uk borders will be open to cereals from anywhere in the world grown by locally subsidised farmers without environmental constraint. Clearly, given the key rent review elements of productive capacity and related earning capacity, this must lead to a reduction in rent.

Adding to all this uncertainty is DEFRA’s “Farming is Changing". I copy here three relevant extracts.

Delinking

We plan to ‘delink’ Direct Payments from the requirement to farm the land, and we plan to make these payments regardless of whether the recipient chooses to continue farming or not. We plan to consult on the detail of these changes and will share guidance with farmers in good time before delinking starts. The earliest we would delink payments is 2021. The delinked payments could be used in any way – for example, to invest in improving productivity, to diversify the business or to retire from farming. This should help to provide more opportunities for new entrants, and existing farmers wishing to expand, or to buy or rent land.

Lump sum

We’re also looking into the option of offering farmers a one-off lump sum in place of any further
Direct Payments they would have been entitled to receive. We plan to run a consultation with farmers later in the year to look into how this could work best. Regardless, the earliest we’d offer the lump sum would be 2021.

ELMS

We want to pay farmers and land managers for providing environmental benefits. In 2024, we plan to launch our new Environmental Land Management (ELM) scheme as one way in which to do this. This new approach isn’t a subsidy. Those who are awarded ELM agreements will be paid public money in return for providing environmental benefits.


At our last Review we resisted a 50% rent increase at Arbitration and won. I hasten to add this experience is not for the faint hearted. However it has left us with a detailed Arbitrators exposition of the buildup of our AHA rent. If we took that and substituted todays numbers the rent even before Brexit and DEFRA’s “Farming is Changing” would be more than cut in half.

“Farming is Changing” cuts the link between the UK wind down of the CAP area subsidy and the "productive capacity and related earning capacity” of the farm so under the legislation it should not figure in any rent calculation. Certainly any attempt by any landlord to lay their hands on any part of a Lump Sum has to be resisted. Furthermore DEFRA makes it clear that ELMS "isn’t a subsidy” in other words payments will not include a profit to the farmer which a landlord could claim.

The net effect of all the above is that rents assessed purely under AHA86 productive capacity and related earning capacity would be Zero.

This assessment agrees with Sean Rickard's 'half Uk farming will fail’ paper, his conclusion I copy here:

The agricultural sector in the UK faces significant challenges from No Deal, as tariffs and non-tariff barriers are erected to our exports at the same time as the UK Government largely removes tariffs on imports from third country farmers. British farmers will be caught between increased competition from third countries importing produce to the UK, and increased difficulty and cost when exporting to our biggest market, the EU. Free Trade Agreements to reduce those barriers will take many years to negotiate. Coupled with the loss of the Basic Payment Scheme of support payments by 2022, the driving down of farm revenues means that more than half of farms could go out of business.

The question is are we collectively strong enough to make it clear to all those who have had the sticky hands in our pockets for far too long that the party is over?
 

chipchap

Member
Location
South Shropshire
The subsidy party most certainly is coming to an end.

However food production is being forced into a straight jacket of regulation in the developed world, and it is only a matter of time before this folly leads to a shortage of food, not only in the third world where the resources and wealth do not exist to support high food prices, but also in the more developed world.

The only dilemma will be whether to buy tractors or guns.
 

Austin7

Member
Rents weren't zero when wheat was £60 and noone made any profit though we're they?
Exactly my point. The basic premise of an AHA tenancy is that profits are split 50/50 if there is no profit then the only way the tenant is paying the landlord rent is out of his own capital. Yes you are right it does happened, I believe I am right in suggesting that it should not happen.
 

Austin7

Member
If you don't want to pay the rent, give up the tenancy, and let someone else have a go.
I would absolutely agree with you if I were considering an FBT tenancy. Historically in the 1870's and again in the 1920's and 30's that is what happened. Farmers walked away from their farms and in many cases landlords could not find replacements, the land tumbled down to brambles and weeds on ly tobe recultivated in 1940. An AHA tenancy is a different beast. Our tenancy as with many others arose from a joint purchase by landlord and tenant, the tenant therefore has an equity interest in the land. The basis of this partnership between landlord and tenant is laid out in The Agricultural Holdings Act 1986. Both Landlord and Tenant are bound, profits are shared. This is unlike FBT's which are market driven and where the tenant has no equity interest in the land and no on going rights beyond the specific tenancy term. Chalk and cheese.
 
Exactly my point. The basic premise of an AHA tenancy is that profits are split 50/50 if there is no profit then the only way the tenant is paying the landlord rent is out of his own capital. Yes you are right it does happened, I believe I am right in suggesting that it should not happen.
It’s a gamble but a sect.12 notice now for review sept 2020 would appear a “safer bet” for a reduction than anytime in last 20 years......unless the remoaners really have got it all wrong and brexit will be big bonus for farming economy...maybe it will be but the transition is likely to be rocky so a review next year has much to commend it.
 

chipchap

Member
Location
South Shropshire
Over the medium and longer term rents always rise, simply by virtue of inflation. My approach is to simply go along with the status quo and allow inflation to gradually eat into the rent, rather than serve a notice expecting an actual reduction of rent, with all the bad feeling it would create. That is unless things get very bad, in which case I would probably walk away in any case.
 
Over the medium and longer term rents always rise, simply by virtue of inflation. My approach is to simply go along with the status quo and allow inflation to gradually eat into the rent, rather than serve a notice expecting an actual reduction of rent, with all the bad feeling it would create. That is unless things get very bad, in which case I would probably walk away in any case.
Hope your landlord or whoever speaks for him is as understanding of your goodwill..... or is he thinking if we lean on chip chap hard he will likely surrender his aha tenancy and we can let the house to some city type and get the land let under fbt terms? It’s all about trust but do we trust a commercial land agent to have a moral compass?....
If not it’s probably a good time to serve a sect.12 notice.
 

Austin7

Member
Over the medium and longer term rents always rise, simply by virtue of inflation. My approach is to simply go along with the status quo and allow inflation to gradually eat into the rent, rather than serve a notice expecting an actual reduction of rent, with all the bad feeling it would create. That is unless things get very bad, in which case I would probably walk away in any case.
Is this in the context of an AHA86 tenancy? If so am I hearing you correctly? You are prepared, by knowingly paying an excessive rent, to give away your capital to your Landlord purely on the basis that you don’t want to hurt his feelings and then once he has all your capital you would walk away and leave him your farm?

Of course, it may be that you are already on a low rent. If not I have a better plan. In a quiet and civilised way you should seek a September 2020 review. If your current AHA rent is say £80 per acre then I would suggest there is plenty of room on the downside whatever our new PM comes up with on 31stOctober. If you have another generation on the AHA tenancy or you are a young man yourself the farm as an investment is worth no more than 1.5% return so £5,333 per acre at £80 rent. If the rent drops to £60 it is worth £4,000 per acre. The difference between the investment value and the open market value is the Tenants Equity and the Marriage Value. Here lies the reason that Institutional landlords are running for cover and selling their tenanted farms as best they can. So, rather than paying too much rent and walking away, get your head around the possibility that this could be your opportunity to buy the farm.
 

chipchap

Member
Location
South Shropshire
I am not willing to serve a notice until rents are on a downward trend, and I could get a worthwhile reduction of 20% or more. I feel this is unlikely to happen for 3-5 years, by which time inflation will have put things right anyway.
Are you expecting landlords to roll over and give these sorts of reduction now?
 

Austin7

Member
I am not willing to serve a notice until rents are on a downward trend, and I could get a worthwhile reduction of 20% or more. I feel this is unlikely to happen for 3-5 years, by which time inflation will have put things right anyway.
Are you expecting landlords to roll over and give these sorts of reduction now?
“Are you expecting landlords to roll over and give these sorts of reduction now?”

Answer Yes

I don’t know about yourself but we keep a friendly contact with our landlord even when we are at odds. In our discussions with them about the current farming situation and rents, their view is that even with a Brexit agreed with the EU “the likely outcome will be downward pressure.”

You can be absolutely sure that sitting on every landlord’s desk is a report from their Agents telling them that rents are going to fall. No Agent in the current circumstances would fail to post his excuse sheet. A few years ago I received a box of old files concerning our farm amongst them I found a report written by the then Agent to Landlord in 2002 predicting that we would serve a notice to Review and that the then current rent was not defensible, they were right we did a year later serve a notice and the rent was cut by more than 20%. Lesson is they were expecting it then as they are again now.


However no doubt your landlord will get over the shock of not getting a Notice to Review from yourself, which leaves us with the protection of your inflation theory. Inflation is certainly impacting on us, Anglia Farmers Ag inflation index shows a 7.5 % rise in our costs in the last 12 months. Should we be inflicted with a no deal Brexit then expect devaluation of the currency and import tariffs both will add to cost inflation. On the Income side, we lose our area payments and have to compete against imports arriving in our markets tariff free. I can see no inflation of income only deflation. I hope you are right but I fear you are not.
 

O'Reilly

Member
Does this 50% of profit rule include non farm enterprises? I know a few people who use some of the buildings for alternative enterprises, just wondering how they would fare in a rent review.
 

Goweresque

Member
Location
North Wilts
Furthermore DEFRA makes it clear that ELMS "isn’t a subsidy” in other words payments will not include a profit to the farmer which a landlord could claim.
If ELMS payments don't include any profit why will anyone take them? No farmer, (whether tenant or owner) is going to sign up to a scheme that guarantees them less cash at the end of every year than the beginning, so to say ELMS will not have any 'profit' in it for the farmer is nonsense. If ELMS is payment for contracted environmental outcomes, then there is the prospect of a profit, if you produce the contracted environmental goods, just as there is the prospect of a profit if you sign a contract to supply 1000 tonnes of grain at £X/tonne.

So as far as I can see the new environmental payments are just as much part of the productive capacity of the land as the ability to grow a good wheat crop. You're just selling a different aspect of the productive capacity of the land - environmental goods instead of food crops. Now obviously one would have to take into account the costs associated with an ELM scheme, and also the likelihood that you will not reach the contracted levels to trigger the payments in any given year, but there will undoubtedly be a degree of ELMS money going into the productive capacity of the land calculation for rent determination.
 

Austin7

Member
If ELMS payments don't include any profit why will anyone take them? No farmer, (whether tenant or owner) is going to sign up to a scheme that guarantees them less cash at the end of every year than the beginning, so to say ELMS will not have any 'profit' in it for the farmer is nonsense. If ELMS is payment for contracted environmental outcomes, then there is the prospect of a profit, if you produce the contracted environmental goods, just as there is the prospect of a profit if you sign a contract to supply 1000 tonnes of grain at £X/tonne.

So as far as I can see the new environmental payments are just as much part of the productive capacity of the land as the ability to grow a good wheat crop. You're just selling a different aspect of the productive capacity of the land - environmental goods instead of food crops. Now obviously one would have to take into account the costs associated with an ELM scheme, and also the likelihood that you will not reach the contracted levels to trigger the payments in any given year, but there will undoubtedly be a degree of ELMS money going into the productive capacity of the land calculation for rent determination.
The first thing we have to say is that the devil will be in the detail. I expect that we will look back fondly at the simplicity of the current scheme. However DEFRA have clearly stated that ELMS will not be a back door subsidy. In WTO terms this would not even feature as a Green Box support. Taking the DEFRA statement at face value ELMS income would equal ELMS costs plus farming income foregone. Any additional "profit" to the farmer would only occur my taking advantage of the ability to use marginal land. Obviously it would not produce a loss and probably a small but difficult to measure gain. I look forward to an interesting discussion with my Landlords Agent. Overall my point stands that the current Agriculture Bill will mean that Agricultural support which has held up rents for so long will no longer figure in the same way as it has, the inevitable consequence is that rents will drop substantially. However the current Agriculture Bill dies when Boris prorogues Parliament. What comes back post 31st October will depend on Deal or No Deal. If No Deal then I think the Government will be forced into some sort of intervention scheme, so back to the 1947 Act. The current burden of Brussels red tape will be fond memory.
 

Forum statistics

Threads
159,954
Messages
3,652,402
Members
40,290
Latest member
JohnHL

World Food Day: NFU Cymru celebrates Welsh food producers at the Senedd

  • 128
  • 0


Written by Rachel Martin

NFU Cymru members and Assembly Members have been celebrating the role that Welsh farmers play in producing nutritious, high quality, safe affordable food during an event at the Senedd today on World Food Day (October 16).

The lunchtime event, which was sponsored by Llyr Gruffydd AM, included a special menu of fine Welsh produce.

Speaking at the event, NFU Cymru...
Top