Contract Farming Agreements are nothing new, but at Edwin Thompson we are finding that as farmers look at alternatives to their current business structures these agreements are becoming more relevant. So, what does a Contract Farming Agreement entail and what considerations need to be taken into account?
The basic principle of a Contract Farming Agreement is that a Farmer will engage the services of a Contractor to implement a farming policy. Typically, the Farmer will:
- Provide the land and buildings
- Provide the working capital to pay for inputs
- Undertake the bookkeeping and administrative management
- Provide the strategic management of the business, including the preparation of the farming policy
Entering into such an agreement can allow the Farmer to free up capital and reduce operating costs, whilst retaining overall control of the land and business. This protects the ‘Active Farmer’ status, and along with it the ability to claim subsidies and utilise agricultural tax benefits. It is important to remember that the Farmer will also retain the financial risk involved with a farming business, if it is a bad year the Farmer will take that hit.
The Contractor will provide labour, machinery, and equipment. In return they will receive a fixed fee for their work and will also be entitled to a share of any profit generated, the percentage of that share is agreed in advance and included within any agreement.
Contractors are still liable for their own costs such as insurance, fuel, and machinery maintenance, however these agreements off the Contractor an opportunity to spread these costs over a greater area.
Contract Farming Agreements are typically suited to arable farming situations; however, we have recently been involved in the creation and management of number of livestock based agreements. These work on the same basis as other agreements with the Contractor providing the labour and machinery, and the Farmer providing the land buildings. In addition, the Farmer provides the breeding livestock with returns being calculated on the value of the lambs or calves produced. Alternatively, the Famer hires the breeding stock from the Contractor by paying an annual hire charge.
Share Farming Agreements are slightly different, they are typically based on two separate farming businesses collaborating on an enterprise on the same land. This type of agreement may suit a Farmer looking to retain management control working with another, such as a new entrant or young farmer, who is looking to progress but currently lacks the capital required to do so. Under this type of agreement, the day-to-day responsibilities of each party are agreed, and the profit share is proportionate to the level of input.
Both Contract Farming Agreements and Share Farming Agreements offer a high degree of flexibility, meaning they can be adapted to suit the needs and goals of the Farmer; therefore, the first stage should be to consider what you want to achieve from such an agreement. These goals form the foundations of any agreement, and in some cases may dictate which Contractor is ultimately instructed.
Before entering into any form of agreement it is important to seek professional advice to avoid agreeing to something that may turn out to be different to what was originally intended, or possible something that may not protect your ‘Active Farmer’ status. The team at Edwin Thompson have many years’ experience in such matters and are able to assist through the process, from agreeing terms to drafting contracts and managing agreements. Please contact our Galashiels office on 01896 751300, or our Berwick office on 01289 30443 should you wish to discuss any of the above further.