Contract farming agreements maximise flexibility for landowners
Richard Haggart explains the mechanism of the agreement and the benefits to the parties involved.
Contract Farming Agreements are found in a wide variety of circumstances including arable, mixed and livestock holdings.
Over the past year, Galbraith has been involved in setting up an increasing number of arable and livestock agreements. A Contract Farming Agreement (CFA) is an arms-length agreement in which a landowner (the farmer) engages the services of another (the contractor) on agreed terms and pays him according to a formula, to carry out work. Typically, CFAs are set up for three to five years.
This kind of arrangement is well-established, and provides the landowner with an alternative to an in-hand farm or leasing the land to a tenant. It is an agreement for the provision of services governed by a commercial contract between the farmer and the contractor.
As well as being simple to understand and easy to operate, CFAs should be inexpensive to administer and provide flexibility to both parties to agree terms.
It is usual for the farmer to provide the land and buildings as well as fixed equipment such as fencing, drainage and equipment for livestock handling.
It is also their responsibility to provide the finance in order to provide cash-flow to the agreement along with short and long term farm policy objectives. The contractor usually provides labour, machinery and machinery costs, management, breeding livestock (via a livestock hire agreement) and replacements.
The process of creating a CFA is relatively straight forward. On most occasions, particularly arable farms, the contractor may already be known to the farmer.
As this is an agreement between parties for mutual benefit, fostering the relationship between farmer and contractor is one of the key ingredients to a successful arrangement. Galbraith takes a hands-on approach to nurturing this relationship and continues to manage the arrangement via regular meetings.
As a firm, we handle many or all stages of the process on behalf of the landowner, from advertising in rural media outlets and constructing a list of potential local contractors to preparing a prospectus and financial terms and organising structured viewing days. We then invite interested parties to submit a financial proposal covering proposed farming policy and anticipated returns. All this is done before the first interviews are conducted.
Short-listed farms are then visited and final interviews held before references are taken and the contractor appointed. We conclude the process by preparing documentation and chairing any management meetings before the agreement starts and throughout its term. The contracts we manage have proved beneficial to both the farmer and the contractor and can be utilised on both arable and livestock farms.
ADVANTAGES OF CFAS
For the farmer...
- Avoids creation of a tenancy or partnership
- Retains tax reliefs associated with land ownership
- Retains active farmer status for Basic Payment Scheme (BPS) claim
- Can release capital by selling machinery fleet
- Lowers overhead costs
For the contractor...
- Improves economies of scale
- Larger farming portfolio
- Incentivised by receiving larger percentage of "divisible surplus"
Richard joined the Rural department of Galbraith in 2016. Based in the Perth Office, Richard is involved in carrying out valuation work, agricultural consultancy and management work.