Shifting balance of risks in farming agreements
Farm businesses tendering to become a contractor under a Contract Farming Agreement are seeking greater certainty about the income they will receive from the venture and are striking deals which shift the balance of risk back towards the farmer.
As CFAs are renewed or renegotiated the trend is for a higher contractor’s charge than has been seen in the past.
Contractors are looking at ways to improve and protect their position. Five years ago the average contractor’s charge was around £230 to £240/ha, but now we are seeing contractors bidding at levels around £275 to £300/ha for typical contractor services on combinable crop farms in the Midlands.
We’re also seeing a shift in the first tier of divisible surplus to be more in the contractor’s favour. In 2016, the average first split to the contractor was 59 per cent, but the trend on review is for that percentage to move upwards.
At low levels of profitability that protects the contractor, but at good levels of profitability for the farm the returns for both parties are not dissimilar.
The contractor’s charge is the payment per hectare that a contractor receives for providing labour and machinery and the day-to-day management to farm the land under a CFA.
The divisible surplus is the revenue that is divided between the farmer and contractor after variable costs, the contractor’s charge, fixed costs and the farmer’s retention or first charge have been deducted from receipts.
A Contract Farming Agreement is a joint venture, between a landowner or tenant (referred to as the farmer) and another farm business (known as the contractor), where the farmer provides the land and buildings and engages the contractor to provide the services to grow the crop.
Contractors tendering for a new CFA should make sure they are fully costing for the level of service they will be providing and show keen attention to detail.
Are they taking crops back to their own farm and storing them on behalf of the farmer? Are they doing all the hedge cutting? Is the contractor doing all the field work and agronomy? You have to be very clear and careful about what is provided because the contractor’s charge can vary massively from the average levels depending on the agreed level of service provided.
My advice for farmers is to be fair and honest about the true performance of the farm and be willing to keep reinvesting if they want to attract the best offers.
Some farmers are very good at looking at reinvestment back into the farm, for example into drainage and storage, but others aren’t prepared to spend much money. However, if you have poor storage you are reliant on a contractor with their own or co-operative storage, so you are going to limit your options.
James Turner, Associate in the farming department of Strutt & Parker
