Don’t let go of Contract Farming

The roller-coaster ride is back – commodity prices are falling and input prices are rising resulting in an imbalance between risk and reward.

But Guy Plenderleith, agricultural consultant at Brown & Co’s Bury St Edmunds office says, despite the financial squeeze this puts on Contract Farming, it is possible to ’keep the show on the road’.

With gross margin estimates for some crops falling from over £400 per acre to below £150 per acre the net proceeds, to share, are reduced to circa £125,000 on a 500 acre unit.

While this stretches the respective demands of Farmers to protect their returns and contractors to maximise economies of scale through increased acreage, Guy believes there is a way forward.

"Where a farmer might not wish to contemplate a gross margin return from his cropping of less than the SFP, a Contractor may see it as providing a small contribution to his overall return, net of his marginal operating costs.

"For example, assuming a Contractor’s 1st Charge of £100 per acre, a Farmer may see the lowest estimated acceptable gross margin to be £130 per acre, to allow for a share of overhead costs.

"In the current economic climate, this might be difficult to achieve. For a Contractor, a contribution of £80 per acre may well provide a positive contribution to his marginal, costs. Much of his investment in machinery and men may be difficult to reduce and so, providing he can cover his marginal operating costs, then these lower returns are useful, if not exciting.

"One way of balancing these demands is to divide the contractor’s 1st Charge into two stages – a smaller 1st Charge and an interim share of Divisible Surplus; for example, a 1st Charge of £80 per acre plus 100% of the first £20 per acre of Divisible Surplus gives the same result.

"This shelters the Farmer from the effects of exceptionally low gross margin performance (and perhaps the preference not to crop) whilst providing the Contractor with some modest marginal return (and the hope of an uplift in prices). The marginal cropping decision can largely be left to the Contractor; this might avoid potential large swings in cropping areas and the resultant impact on their business.

"This alternative structure retains the integrity of the standard Contract Farming agreement in a very uncertain future. Ultimately, the aim is to keep the ’show on the road’ for the hope of a more profitable future."