Velcourt CEO interviewed in Estate Gazette

Interview with James Townshend in the Estates Gazette

 

  (original article by Katie Puckett)

 

 
He may be one of Britain’s biggest farmers but James Townshend does not exactly fit the traditional stereotype. 

The chief executive of farming management company Velcourt is more likely to be found behind a desk than driving a tractor or leaning on a five-bar gate, even though he is responsible for 55,000ha growing cereals, potatoes, sugar beets, soft fruit and vegetables, not to mention nearly 2,000 cows on his family farm in Dorset.
Townshend says: “We would tend to operate in those areas where management is critical to the underlying performance of the asset,” he says, explaining how most of the land that Velcourt manages is good-quality arable that can be farmed at scale. 
“We expect to be responsible for the delivery of an agreed business plan, so we are accountable for profit generation and we would expect to link our remuneration to bottom-line profit. 
“My belief is agriculture needs good management expertise, good technology, good control systems and well-trained people in the driving seat.”
This detailed understanding of the business of farming does, however, make Townshend a  good person to discuss maximising any investment in farmland, from what to buy to how to manage it.
In the past five years, rural land has become the safe haven of choice for major institutions and high-net-worth individuals alike, offering steady if low returns, decent long-term capital growth and a shelter from inheritance tax. The IPD UK Annual Rural Property Index shows land has outperformed commercial and residential property and equities and bonds in the past 10 years, with annual returns of 13.2%. As investors have bought up swathes of British farmland, many have turned to Velcourt to manage it for them.
It has seen a net increase of 2,000ha in land under management since 2008, and advises on a total of 73,000ha. 
Established in 1967, Velcourt Group plc is today a £31.8m-turnover business, with clients ranging from private individuals and farmers to institutional landowners and universities. 
Steep increases in land value have pushed farm management up the agenda, highlighting its importance for maximising annual returns. 
Agents describe a drive to align the very different objectives of investors and farmers, in some cases by giving individual farmers a greater stake. Velcourt’s model, on the other hand, could be described as “corporate farming”, an alternative to the traditional family farmer or long-standing tenant. The company is engaged by landowners to manage day-to-day farming operations, under either a farm management or contract farming agreement, taking a share of the profits as its principal remuneration. 

 

Retaining identity

 

Velcourt employs 36 farm managers, each typically responsible for a consolidated block of land owned by different investors, where each farm retains its identity and has its own set of accounts.
Velcourt also invests heavily in both training and research and development, with its own management training scheme and R&D department.
Townshend himself joined in 1978 as the foreman on an arable farm in Kent, becoming a director in 1987 and chief executive in 1991. He does not like the term “corporate farmer”. 
He says: “The point is that you need to have farmers who understand the business of farming – ‘farm businessmen’ – as opposed to corporate farmers. We recognise that land ownership and land operation are two different businesses, with completely different expectations in terms of returns and timescales, and completely different skill bases.”
But Velcourt does invest in the farms it manages, he argues, providing working capital in the form of loans where required. “Even if we are not providing capital, we are still heavily incentivised,” he adds. 
“The reality is that we live or die on our underlying performance, so we have to be better than top quartile or our business does not work.”
Velcourt’s share of the profits is negotiated in each case. If it is providing working capital, it might take 100% after paying rent to the owner; for a purely management service, 20-25% after paying rent and a finance charge.
The terms of an agreement vary depending on a landowner’s objectives but, crucially, it will be compliant with agriculture and business property tax reliefs. The other important feature of Velcourt’s service is that agreements tend to be short term – typically three years to start with, and renewed on an annual basis. 
“If a private investor was to buy a farm and make that farm his place of residence and if he enters into a joint venture with a local farmer and decides after three or five years that he wants to cease that arrangement, that can provide quite a hurdle – to break what by definition is a relationship with a labourer. Whereas we absolutely would vacate if we were asked to do so.” 
Maximising an investment in farmland is down to the quality of the people managing it, says Townshend, but also on buying the right asset in the first place. 
He says: “There is no doubt about it, land quality is key. The right land is absolutely critical, whatever enterprise you are engaged in. The same goes for the fixed equipment that goes with it – grain storage, for example, or if you are milking cows, the right cubicles and slurry handling facilities are a must. Land drainage is also critical – there is no point trying to grow crops if the land is permanently wet.”
Annual yields in the UK on rural land are low – typically 1.5%, 2% at best. Townshend feels there has been a disappointing level of innovation in recent decades, with productivity ignored in favour of sustainability and yields reaching a plateau as a result. 
He says: “Productivity has to increase, albeit in a very sustainable way, so that is a challenge.
“Agriculture as a global sector has a much higher profile than 10 years ago. People have started to recognise that the resources that agriculture relies on are limited. On the other hand, demand is increasing as more people become prosperous and eat more – and they eat meat rather than rice. These are all big drivers pushing up demand around the world.”

 

So how much potential is there to increase yields?

“People say that we are not even achieving 50% of the potential of the species that we are cultivating, so there is a lot of scope. I would not want to go on record as saying we could increase yields by 100%, but I am quite sure that we could and should achieve a 25% increase in wheat yields in the next 10 years. If we did not do that, we would be underperforming.” 
That would inevitably translate into better returns for investors, he says.   “There would be some increase in costs, but there is a very direct correlation between total output and return on investment. If output increased by 25%, you could see potentially another 1% return on the underlying asset value.” 
There has been progress in mechanisation in the past 10 to 15 years, but now this must be matched by biological advances.
“There is a whole range of science that is required to help us make systems more productive and more secure. At the moment, we are faced with some very real issues.” 
Take wheat, he says, the largest single crop grown in the UK. There is now only one fungicide that can control septoria, a major disease affecting yields. Black-grass, a weed affecting cereal crops, is now resistant to all forms of herbicide, rendering some areas not farmable. 
So which land has the greatest to gain from future innovations? Again, it comes down to quality. 
“It is likely to be the arable farming areas and more intensive grassland-based livestock systems – areas where those enterprises fit most comfortably and perform best – where you are likely to see the fastest improvements in productivity. 
“Once you start pushing any agricultural enterprise on to land types where there is an inherent restriction, difficulties become exacerbated when you start trying to ramp up productivity. If you were to plough up the Somerset Levels and try to grow wheat, you would pretty rapidly come unstuck.”
What Townshend claims to be less well qualified to comment on is whether land values will continue to rise. 
“I have always been wrong on forecasting land values so I leave that to others. My guess is that it is probably fully valued. Things never go up in a straight line. I am not saying it is going to necessarily fall but there comes a point when it reaches an impasse. The market appears to be well supported at current levels, but my guess is that it is probably not going to go a lot further in the near term.”
The other thing that Townshend does not do is tell his farm managers what to do with his dairy cows. 
“We have very good people who know an awful lot more about dairy farming than I do. I try to contribute but I am not sure they would necessarily see that as being positive when it comes to the day-to-day management of the herd.”