In Contract farming, one farmer (contractor) and another landowner (owner-occupier or tenant) enter into a flexible contractual arrangement. The contractor is engaged by the landowner to provide labour and equipment under the terms of a contract for services. It is the landowner who provides fixed equipment, structures, and land. In order to perform the services, the contract farming agreement (CFA) authorises the contractor to access the property. There is no tenancy, partnership, or employment relationship created by a CFA.
Contract farming allows landowners to free up working capital that would have otherwise been invested in machinery or agricultural operations. The owner of the land maintains agricultural activities for tax purposes and retains ownership of the property for the purpose of the Basic Payment Scheme (BPS). The landowner assumes the financial risk, exercises decision-making authority, receives the income, and funds the expenditures via a designated bank account. In this article, Contract Farming Law, we take a look at the process and mechanism involved.
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What are the advantages of a farming contract?
In the United Kingdom, where the agricultural workforce is progressively declining (especially post Brexit), contract farming offers a novel prospect for businesses to sustain expansion without the need to divest assets or land.
This is advantageous for both the contractor and the farmer, as the contractor is not required to disrupt generations of agricultural practises and can avoid the costs associated with establishing a new farm or smallholding.
Furthermore, the contractor provides the farmer with invaluable insight and expert advice through their participation in the joint venture. Engaging in a long-term partnership with a contractor may quite simply demonstrate greater economic viability than investing in new machinery or personnel.
Contract farming agreements also provide a consistent and stable income for both the contractor and the farmer. However, a joint venture offers the farmer a chance to free up working capital, predominantly in the form of machinery costs.
The contractor generally provides their own machinery, thereby absolving the farmer of the obligation to maintain and repair plant equipment. Thus, not only do they circumvent depreciation costs, but the farmer also receives unrestricted use of the funds saved by transferring the recurring costs of equipment.
Contract farming provides the ideal opportunity for contractors to expand their businesses without incurring the capital outlay required to establish a farm.
Entering into one or more contracts can enable an entrepreneurial contractor to achieve exponential business growth without incurring the financial burden of land expenses.
This enables the contractor to take advantage of scale of economies. They will ultimately realise a greater return on investment as their business expands and becomes more efficient (through the use of the same services and equipment across numerous farms). This will be accomplished by committing to the same services and machinery.
The contractor will often possess the most advanced apparatus and provide the farmer with every service required to maintain operations in an efficient manner.
Thus, in addition to providing a superior service, they will enhance their expertise and impart valuable insights to the farmer, which will undoubtedly impact subsequent business decisions.
What are the disadvantages of contract farming?
Due to the fact that the enterprise is a joint venture, the farmer does not simply need to step back and enable the contractor to perform all the work and assume all the risk. Although the contractual agreement may precisely delineate the obligations of both parties, the farmer will continue to maintain a certain degree of involvement in the business.
Administration expenses, such as managing the agreement and compiling separate financial accounts, are the responsibility of the farmer. Maintaining the business will inevitably entail certain liabilities. For farmers, the potential problems associated with contract farming include
Increased risk;
Use of technology that isn’t fit for purpose
The use of incompatible crops;
Manipulation of quotas and quality standards;
Corruption and monopolistic dominance;
Indebtedness and excessive dependence on advances.
These potential issues can typically be mitigated through effective management that maintains regular communication with producers and diligently oversees operations.
The Agreement
The contract agreement will contain the following:
- What the terms of engagement are including its length
- Details of how the joint venture will operate detailing responsibilities of both parties.
- The formula for calculating remuneration to each party.
It should be noted that the contract can have flexibility built in; it is a question of what works for both parties. Expert legal advice is essential in ensuring the contract is fair, robust and works for both parties.
How We Can Help
Our team is well versed in dealing with all the various aspects of drafting farming contracts, and we are here to help in any way we can.
We will explain clearly the legal issues and provide open, honest and professional advice.
How to Contact our Agricultural Law Solicitors
It is important for you to be well informed about the issues and obstacles you are facing. However, expert legal support is crucial in terms of reducing risk, saving you money and ensuring you achieve a positive outcome.
To speak to our Agricultural Law solicitors today, simply call us on 0345 901 0445 , or allow a member of the team to get back to you by filling in our online enquiry form . We are well known across the country and can assist wherever you are based. We also have offices based in Cheshire and London.
Disclaimer: This article provides general information only and does not constitute legal advice on any individual circumstances.
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