FOR some time now the Tenant Farmers Association has been sounding warnings about the over-inflated level of rents being tendered for land and farm holdings offered on Farm Business Tenancies.

Understandably our message has been somewhat affected by the “they would say that wouldn’t they” syndrome. However, when an outfit such as Anderson’s Farm Business Consultants, with no particular axe to grind, highlights the same concerns then perhaps it will mean that more people sit up and take notice of the alarm bells that the TFA has been ringing.

Anderson’s reports that, normally, it would be expecting rents on Farm Business Tenancies to equate to the value of around three quarters to a tonne of wheat. In the current market that would put such rents in the range of �115 to �150 per acre. However, it has not been unusual to see tender rents, particularly for arable land, in excess of �200 per acre which, given the increase in costs for other farm inputs, are clearly unsustainable.

The TFA has had many discussions with individuals who have tendered for available arable land and holdings over the few past months who have been unsuccessful with tenders in the region of �150 per acre. What is really alarming is that these are individuals who have properly assessed the potential profitability from farming the opportunities being offered and have added to that an element of “key money” in the hope of being able to secure the farm. Given the objective advice from Anderson’s that such rents are at the high end of the right ballpark why is it that the market is failing to act rationally?

One reason is that there has been a tendency for tender rents to be driven by large owner- occupiers with an overarching desire to expand their farming operations on the premise of spreading fixed costs. This ethos may be applicable in situations where the additional acres are truly marginal to the core farming operation but it clearly makes no sense when the additional acres run into the hundreds. The extent to which machinery is driven harder, additional labour is required, more repairs are needed and other fixed costs also increase, are all routinely underestimated by those who bid high.

Another driver towards unsustainable rents is the tendency not to factor in any margin for error. Farming is an unpredictable business with much dependent on aspects beyond the control of the individual farm business not least the weather, world prices and disease. It would appear that the sound practice of conducting sensitivity analysis around some of the key elements impacting upon performance is absent from the minds of many individuals bidding over the odds. Whilst things may go without a problem in one year that is no guarantee that they will follow suit in other years.

Landlords too have got to understand the dynamics of farming to ensure that they accept rental bids which will provide a sustainable return. To a large extent landlords will be driven by the advice of their agents who may not always have the long-term in mind when considering the tender offers submitted. It is no defence for landlords’ agents simply to argue that in accepting the highest bids they are merely responding to the marketplace. As professional people they should be applying their professional judgement rather than abrogating their responsibilities.

The financial risks faced by a landlord who accepts the highest rents tendered are huge. The costs involved in dealing with a tenant default when there is an inability to pay rent should not be underestimated. Better to have a sensibly calculated rent at a sustainable level than accept a high rent/high risk cocktail which could backfire. Landlords should also have an eye to making sure that there is sufficient return to allow the tenant to be able to maintain the holding in good agricultural condition and adequately repair and maintain the landlord’s fixed equipment.

It is, however, pleasing to see that, away from the testosterone driven tender environment, rents agreed at review within Farm Business Tenancies are generally settling at levels which are much more sensible. Routinely we are seeing rents at review settle at between half to two thirds of tender rents for new leases – at and around the �100 to �120 per ace mark. Such levels fit precisely with the rule of thumb to which Anderson’s have referred. This evidence shows that landlords and tenants are able to see the wood from the trees when they are in a continuing business relationship within which both parties understand the need for sustainable returns for both parties. These settlements represent the true marketplace. They are informed, negotiated, agreed and settled taking into consideration all relevant factors in a way in which the tender process fails to do.

A better way forward for new lettings would be for landlords to use the levels of rent settled at review to inform their view of rental expectations and to ask for expressions of interest from potential applicants at fixed levels of rent, choosing those applicants whose business plans best reflect good practice and their long-term ethos for their holdings.

: : George Dunn is chief executive of the Tenant Farmers’ Association