November 02, 2020

Article

With the proposed phasing out of the current Basic Payment and Environmental Stewardship Schemes coinciding with the introduction of the Environmental Land Management Scheme the structure of UK farm businesses is likely to change. The evidence of this was apparent to me whilst harvesting in Australia. The Australian government has taken a hard-line approach to reduce farm subsidies with the aim to boost overall productivity. This approach has left Australian farmers amongst the lowest receivers of government grants second only to New Zealand. The result of this reduction encouraged the nationwide expansion of both corporate and cooperative farming. Although contract farming agreements can be successful in the South West they are inherently more widespread with arable enterprises in the Eastern counties. These agreements can take any number of forms from a simple machinery share to more formal Farm Business Tenancy (FBT) agreements. The specifics of each agreement should be flexible to satisfy both parties, however, I will summarise key potential benefits and pitfalls.

Machinery Share

  • More efficient use of large capital expenses such as combines, forage harvesters, sprayers or large tractors.
  • Timing of use, for example, harvest or flag leaf spraying must be agreed upon by each party.
  • Repair/Renewal policy must be in place.

Contracting

  • Landowner/farmer retains day to day control of the business.
  • Can release equity from machinery sales for other investment.
  • Access to modern machinery with skilled labour.
  • Frees up time to focus on other areas of the business, for example, milk yield/herd fertility or diversification.
  • Often short term agreements which allow contractor cost competition.
  • Reduction in running costs for repairs, renewals and insurance.
  • Potential frustration to ensure optimum timing of operations.
  • Structured correctly, retaining title of ‘farmer’ rather than ‘landowner’ has tax relief advantages
Profit Share
  • Landowner participates with higher level decision making without day to day involvement and associated stress.
  • Contractor motivated by profit rather than strictly output to increase share of profit. This can also result in priority at critical times.
  • Typically short to mid term agreements as some capital expenditure may be incurred by contractor.
  • Retaining title of ‘farmer’ rather than ‘landowner’ has tax relief advantages.

Farm Business Tenancy

  • Allows easy forecasting/budgeting and lowered risk as income is fixed.
  • Provides predictable cash flow throughout the year.
  • Typically mid to longer term agreements.
  • Landowner must be prepared to give full control to farmer, accepting their farming practice.
  • Landowner no longer has title of ‘farmer’ and associated tax benefits.
With the UK government’s environmentally focused subsidy initiative leaves farmers fearing the future of commodity prices and a potentially more complicated/labour intensive application format. This combined with current dependence of many farmers on government subsidies and the general uncertainty of their future value may give rise to a rethink of business structure. A landowner/farmer must determine the level of control/risk, farm suitability and income potential when considering an appropriate agreement. As an opinion I believe that contract farming agreements potentially provides collections of ambitious farmers the opportunity to reduce scale inefficiencies. Also, for farmers/landowners with different priorities or nearing retirement age an ability to enjoy farming by providing opportunities to others without the stress of finances, management and weather. However, to minimise stress, finding someone suitable with the potential for a successful business relationship must not be understated.

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