Contract farming can be an effective method for those looking to get a stronger foothold in the industry. Ben Pike reports on all the essential need-to-know information.
At a time when farm businesses need to sweat their assets to prop-up farm incomes, contract farming can be a useful way of earning extra cash.
It comes in many guises – from a single, annual agreement to grow, manage and harvest a neighbour’s crop, to a large-scale contracting enterprise.
The real value for those who want to contract farm is in finding a market which demands a particular set of skills and capabilities, be these of an individual or from their machinery.
Jill Hewitt, technical consultant at the National Association of Agricultural Contractors, says there is a good market for young entrepreneurs wanting to fund a route into farming.
She says: “There is definitely a market for young people, provided they set out on the right professional footing, looking closely at their costings and business management.
“Many go on to buy land to farm themselves. For many, it is a way of getting into the industry.”
But Jill says it is vital they look at the long-term, setting sensible pricing structures.
“There is no subsidy for contractors, so to remain in operation they have to make the finances work. There are many specialists out there who are investing serious money into kit, and they are always on the lookout for the next opportunity in farming.”
Tom Paybody from Fisher German says there are good opportunities for young people to use contract farming agreements (CFAs) to get a get a foothold in the industry.
The working capital requirement is far less than it would be if they owned a farm, he says.
“They can earn a profit without having to rent or own ground. The principal of a CFA is the landowner will supply the land and buildings and the contractor provides labour and machinery.”
All the working capital comes from the landowner and the contractor charges a fee for their services. In an arable situation, when the crop is sold, costs are deducted and the profit is split between the two parties.
Tom says: “Typically, this split is 70:30 or 80:20 in favour of the contractor, up to about £40/acre. It may be 50:50 thereafter, then a third tier may be more in favour of the landowner.”
But contract farming is not without its risks, Tom adds.
“Typically, CFAs are set up for between one and three years with a six-month notice period, so you could find yourself contract farming 1,200 acres one year, then it is all gone the next. So there would be no security of tenure.”
But Tom says the landowner also takes on a huge share of the risk.
“Landowners are responsible for fronting all the input costs, which can be as much as £450/acre.”
The key to securing a CFA is to be highly professional and personal, Tom advises.
“Farming is a personal thing. For our clients, we would go to tender from the outset and would look at how potential contractors run their office and whether they have an awareness of the broader issues relating to environmental sensitivities and heath and safety, for example.
“Those who are running their business very commercially are the ones which will succeed.”
With retiring farmers and investment buyers needing to remain active in the eyes of the taxman, Tom says there were doors opening for contractors.
“There are a lot of opportunities out there for the younger generation. What I tend to see is a smaller business with machinery taking on these CFAs growing, then going on from there to farm their own land.”
If you are going to operate on someone else’s land, your mistakes are magnified, and on a high-value crop, this could be catastrophic. The National Association of Agricultural Contractors recommends all contractors are appropriately insured against loss of yield
An understanding of:
It is vital all contractors are properly qualified to take on tasks they are asked to do. Machinery should be tested and operators must be up-to-date with the appropriate training
Before starting a job, ensure you have the full information from the landowner about footpaths, watercourses, environmental risk areas and bio-security requirements
The landowner should warn all contractors about all hazards, such as power lines, hidden obstacles or dangerous terrain
A good CFA should:
explain who is responsible for supplying and purchasing sprays, seed and fertiliser
Expansion: A business can grow without the need for large amounts of capital investment into land, buildings or people.
Stability: Both farmer and contractor are linked with a common goal, maximising returns and allowing longer term planning and investment.
Opportunity: There is an increasing number of private investors in farmland who will not want to farm the land themselves.
Retirements: Many retiring farmers need to remain ‘active’ for financial reasons, but do not have the physical capabilities to farm the land themselves.
Niche: Specialist crop growers, such as vegetable businesses or sugar beet growers, want the most efficient kit and skilled operators looking after their crop.