As 2023 starts to shape up, we have recently seen an analysis of farm rents from DEFRA and a series of comments on land prices from the main agricultural land agents, both of which make interesting reading.
The summary of recent farm rents is taken from the 2021/22 Farm Business Survey and covers the year up to February 2022. The full report runs to some twenty-eight pages, but key features include:
- Agricultural Holdings Act (AHA) rents fell by 4% to £177/ha, taking them back to levels last seen in 2019, whereas Farm Business Tenancy (FBT) rents dropped by 6% to £225/ha
- Seasonal rents bucked the trend, rising to an average of £181/ha
- General cropping and dairy rents are the highest for both FBTs and AJA agreements, with prices ranging from about £275-£350/ha. Grazing rents, both in less favoured areas and lowland were between £90 and £150/ha.
- There were considerable regional variations, with rents generally being higher in Eastern England and the Midlands, but lower in the Northeast and Northwest. Generally almost all categories of rent have shown little change in recent years and are standing at slightly more than they were five years ago.
Looking at freehold land, the figures are rather more bullish. Both local and national agents are reporting sales of bare land taking place in recent months at prices in excess of £11,000 per acre, with most commentators anticipating further rises in the next twelve months, both for arable land and pasture.
There is less unanimity about what is driving these prices, but given the very small proportion of land which comes to the market annually, small factors can have a disproportionate influence. Various causes have been given, including reasonable profits in recent years, rising inflation, global insecurity, advantages for both Inheritance Tax and Capital Gains Tax, and the search for carbon neutral investments. Whichever way you look at it, this combination of factors is pushing prices upward and most commentators would agree that prices are now close to or above their previous high points.
All of this is interesting and further details are available on the websites of the main agricultural land agents or, for rents, farm rents. However, what no one has yet explained is how this fits into the scenario envisaged when the impact of phasing out flat rate subsidies was first considered. At that time, rent levels were clearly attributed to flat rate payments. The “impact assessment” published in September 2018 said quite clearly:
“As direct payments have led to an increase in rents, their withdrawal will see the reversal of this impact.”
The document went on to provide illustrative examples showing rents falling by between 50% and 75% as a result of the removal of such direct payments. Given that we are now in year three of the seven year run off, there seems little evidence of the linkage referred to.
Clearly, certain factors need to be taken into account, not least the rise in commodity prices in recent years and the fact that the subsidy cuts were phased in and haven’t really started to bite. Nonetheless, it is worth noting that the survey data largely predates the surge in food prices which followed the beginning of the Ukraine conflict and the scale and speed of the subsidy withdrawal has been known for some time.
We can perhaps come to two conclusions. Firstly, the clear and direct linkage between subsidy and rents which was taken as fact in the 2018 impact assessment is looking somewhat tenuous. There almost certainly is a linkage between profitability and land/rent prices in both the short and long term but subsidy is only part of the profitability so cutting subsidy in itself has little impact on rents. Secondly, and perhaps more importantly, the anticipated reduction in rents was seen as a key factor in trimming farm costs and thus softening the blow of subsidy removal. Since this is not happening, survival is much more dependant on market prices and reductions in other overheads, both of which are uncertain.*The views expressed are the author’s and not ICAEW’s.