Landowners need to review contract arrangements
Strip the subsidy out of your contract farming agreement and calculate returns on a crop-by-crop basis, advises Fisher German farm business consultant Richard Sanders. Most of his clients’ new agreements are based on a new model which fits in better with the Single Farm Payment (SFP), while many existing agreements are being reviewed.
“Many existing whole farm arrangements will not work and need to be redrafted,” he recommends. “Landowners need to start by asking whether they should farm the land at all. Then they should structure an agreement that ensures they get a decent reward for the risk involved in investing in a crop.”
Fisher German is making a number of key changes to its existing contract farming agreement, which include:
• The farmer’s first charge is removed and the farm’s single payment is excluded for the farmer to retain
• The contractor’s cross-compliance responsibilities, such as appropriate soil management and pesticide applications, are reflected with a separate contract fee
• There are then two tiers of divisible surplus distribution. The first is substantially in favour of the contractor so that reasonable crop yields move the contractor into profit as soon as possible
• The second tier is nearer to an equal share to give the farmer a reward for growing the crop and so that they can share in benefits of any crop price increases
• Land with some development potential should be included within a crop rotation – this reduces the risk of it being treated as a non-business asset
Landowners should not only be making a decision about whether to farm, but also which crops to grow, Mr Sanders stresses. “Clearly they need to maximise potential from winter wheat. Returns from oilseed rape are less reliable, but can benefit the rotation. It may not make sense to grow barley, second wheat or beans at all, but put more fallow in the rotation, especially in less productive fields.”
Care should be taken to build in the SFP when preparing the year-end accounts, to satisfy the Inland Revenue that it forms part of the farming income. “Consideration should also be given to inheritance and capital gains tax planning. These taxes do often rely on the extent of the farming activity, so any decision on the areas to be actively farmed should be made with these issues in mind.”
The result should be an agreement that delivers a healthy income to the farmer and maximises returns from farms, or areas within a farm, where crops can be profitably grown. “We are noting a widening of the gap between the performance of different contractors as the crop subsidy is no longer available to cushion the effects of average or poor yields. Good contractors will benefit from this kind of arrangement and will be able to expand to take on more land on the back of results that are more transparent,” Mr Sanders concludes.
