Farming News - The Benefits of Contract Farming

The Benefits of Contract Farming

30 Jun 2020
Frontdesk / Finance

As the agricultural industry starts to navigate through uncharted waters in response to the potential challenges and changes in government support, H&H Land & Estates is starting to see many businesses move away from more traditional farming structures.

With changes to the farming landscape, such as the phasing out of the UK Government’s current system of support for farmers through the Basic Payment Scheme and the Environmental Stewardship schemes, to the environmentally focused initiative in the form of the Environmental Land Management Scheme (ELMS).

Tim Sedgewick, Associate Director of H&H Land and Estates, believes that the use of Contract Farming Agreements (CFA) particularly within the arable sector, is increasing in popularity as joint ventures of this type offer more flexible than a tenancy.

“The overall aim of a CFA is to improve business efficiency through enhancing the performance of the enterprise. Even though the use of contractors in arable farming has long been established as an effective business model, by implementing a CFA both parties open themselves up to new opportunities and become fully invested in the enterprise whilst retaining their individual identity as a business in their own right. This is the case even for new entrants wishing to expand current agricultural operations without having to finance the purchase or rent of land. 

“CFA’s allow the landowner to retain full ownership and occupation of their property whilst maintaining a lifestyle close to agriculture and contractors can benefit from economies of scale plus a guaranteed payment per acre. Its success is achieved through the contractor providing the experience, expertise, skill, technology, and machinery, whilst the landowner provides the land and buildings.”

The ‘farmer’ is the landowner who has engaged the services of another, referred to as the ‘contractor’ who undertakes farming operations over a fixed period. It is an agreement which is flexible and determined by the needs of the respective parties, providing an ideal platform for a mutually beneficial joint venture. The main principals being that:

  • the ‘farmer’ receives a first charge for the provision of the land
  • the ‘contractor’ receives a guaranteed fixed charge for the work involved in the production of the crop
  • any additional income is divided between them

Importantly a CFA agreement also means that the landowner remains actively involved in the management of the farming operations which in turn ensures they retain their ‘farmer’ status and can continue to receive and apply for the Basic Payment Scheme and Environmental Stewardship schemes. Later this will change, with the newly devised Agricultural Bill highlighting that financial support for farmers likely to be determined by the Environmental Land Management Scheme (ELMS).

Tim continues: “CFA’s differ from more traditional agreements such as Farm Business Tenancies which many partners may be averse to because of the more contractual constraints involved. We are seeing that this type of agreement is attractive to landowners who have additional enterprises such as livestock or diversification projects, as the reduced working capital can be redirected into other areas of their business to potentially increase profitability, as well as mitigate risk.”

It is essential that CFA’s are managed in the correct manner to ensure that the landowner is able to satisfy the requirements for both personal and capital taxation benefits. While Contract Farming Agreement provides many benefits, it is strongly advised that professional advice is sought prior to the commencement of any agreement.