The use of Contract Farming Agreements (CFA) are increasing in popularity within the farming industry as joint ventures of this type offer more flexibility than a tenancy.
This is according to H&H Land & Estates, which says it is starting to see businesses move away from more traditional farming structures.
It comes amid looming changes to the farming landscape, such as the phasing out of the EU's BPS to the UK's Environmental Land Management (ELM) scheme.
Tim Sedgewick, associate director of H&H Land and Estates, said CFAs were increasing in popularity, particularly within the arable sector.
“The overall aim of a CFA is to improve business efficiency through enhancing the performance of the enterprise," Mr Sedgewick said.
"Even though the use of contractors in arable farming has long been established as an effective business model, by implementing a CFA both parties open themselves up to new opportunities and become fully invested in the enterprise whilst retaining their individual identity as a business in their own right.
"This is the case even for new entrants wishing to expand current agricultural operations without having to finance the purchase or rent of land," he said.
CFAs allow the landowner to retain full ownership and occupation of their property whilst maintaining a lifestyle close to agriculture.
Meanwhile, contractors can benefit from economies of scale plus a guaranteed payment per acre.
"Its success is achieved through the contractor providing the experience, expertise, skill, technology, and machinery, whilst the landowner provides the land and buildings,” Mr Sedgewick explained.
What are Contract Farming Agreements?
The 'farmer' is the landowner who has engaged the services of another, referred to as the ‘contractor’ who undertakes farming operations over a fixed period.
It is an agreement which is flexible and determined by the needs of the respective parties, providing an ideal platform for a mutually beneficial joint venture.
The main principals being that:
• the ‘farmer’ receives a first charge for the provision of the land
• the ‘contractor’ receives a guaranteed fixed charge for the work involved in the production of the crop
• any additional income is divided between them
Importantly, a CFA agreement also means that the landowner remains actively involved in the management of the farming operations.
In turn, this ensures they retain their ‘farmer’ status and can continue to receive and apply for BPS and Environmental Stewardship schemes.
Later this will change, with the newly devised agricultural bill highlighting that financial support for farmers likely to be determined by the ELM scheme.
Mr Sedgewick explained that CFAs differed from more traditional agreements such as Farm Business Tenancies which many may be averse to because of the more contractual constraints involved.
"We are seeing that this type of agreement is attractive to landowners who have additional enterprises such as livestock or diversification projects," he said.
"The reduced working capital can be redirected into other areas of their business to potentially increase profitability, as well as mitigate risk.”
H&H Land & Estates says it is essential that CFAs are managed in the correct manner to ensure that the landowner is able to satisfy the requirements for both personal and capital taxation benefits.
While Contract Farming Agreement provides many benefits, it is advised that professional advice is sought prior to the commencement of any agreement.