Sunday, November 19, 2017

Balance of risk shifts towards farmer in Contract Farming Agreements

July 4, 2017 by  
Filed under Property

StruttParkerEssexFarm

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 agreements are renewed or renegotiated, the trend is for a higher contractor’s charge than has previously been the case, said Strutt & Parker partner Richard Means on the opening day of last month’s Cereals 2017 event in Lincolnshire.

“Contractors are looking at ways to improve and protect their position,” Mr Means told listeners at the Boothby Graffoe showground on Wednesday, 14 June.

“Five years ago the average contractor’s charge was around £230- £240/ha, but now we are seeing contractors bidding at levels around £275-£300ha for typical contractor services on combinable crop farms in the East of England and 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%, but the trend on review is for that percentage to move upwards.”

Profitability

At low levels of profitability, this sort of split protects the contractor. But at good levels of profitability for the farm, the returns for both parties are not dissimilar – so there is arguably more of a balance between landowner and contractor.

The contractor’s charge is the payment per hectare that a contractor receives for providing labour, machinery and the day-to-day management required to farm the land under a given contract farming agreement.

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.

There was still strong interest in contract farming agreements from contractors, said Mr Means – especially for land and farms which were well-provided for in terms of storage, drainage and other facilities and where the farmer was willing to maintain infrastructure.

Entering into an agrement remained a good opportunity for people who wanted to expand their business without having to buy extra land or enter into a tenancy agreement, which required higher levels of working and long-term capital, he said.

Extra land

But Mr Means warned that the number of interested contractors was “certainly nowhere near” what it was just a few years ago when the wheat price was £160/t and contractors were “falling over themselves” to take on extra land.

“People are taking a more rational decision about how they are able to integrate the land within their own business. They are also likely to ask more questions about issues such as the level of blackgrass and what that will cost them to farm the land.”

While farmers were assuming more of the risk, the average return was in many cases significantly better and more stable than the income from farming in-hand. This was because the farmer benefited from the contractor’s lower labour and machinery costs.

“It is still a very good model for both the farmer and contactor, said Mr Means. “In well-structured agreements, both sides should be incentivised by the same outcomes – producing high yields, controlling costs and meeting the farmer’s objectives for sustainable land management.”

 

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