Stronger together – contract farming agreements19/10/20
Businesses and services are often stronger when they work together. Each party brings their own expertise, knowledge or equipment to the table, and the combination of factors creates something formidable, resilient and new. Contract Farming Agreements (CFAs) are a way for farmers and contractors to create a joint venture, that will pay dividends for both parties. It’s a formal arrangement between a farmer (owner or tenant) and a contractor (a farmer or business in the region) to grow crops. It is not a partnership, but is legally binding, and Terms & Conditions have to be met by those businesses involved.
Working and growing through contract farming
A CFA is arable farming through collaboration. The farmer uses the services of the contractor to provide a more efficient service. Both parties remain an individual entity in their own right, so any income tax, VAT or other financial outgoing is dealt with by each party separately. The farmer can provide assets such as buildings, land, specialist vehicles or equipment, and usually sets up a separate bank account (sometimes called a No2 account) to run the venture. The contractor provides business aspects, such as management expertise, labour, machinery or further storage – elements the farmer lacks, but the contractor can provide to expand the farmer’s capacity.
A binding contract
The contract itself sets out its terms, including the length of the agreement, how the contract will operate and how the profits will be shared. The detailed contract will include everything from the ‘commencement date’ to what constitutes a ‘working day’ – for example, any day which is not a weekend, a bank holiday or a public holiday in England and Wales. It includes the basis of the contract, the supply of services from the contractor and the farmer’s obligations to the contractor. It also should include any insurances, such as liability and indemnity, that are required, and outline notification of the termination of the contract.
Crucially, the farmer makes management decisions about how the land is farmed and which crops are grown, while the contractor (usually another farmer) carries out the operations and management of the crop. For the farmer, a contract farming agreement avoids the need to create new partnerships and other complex arrangements and retains their primary role as farmer. In this way, economies of scale come into play. It allows the maximum employment of working capital, making the most of existing assets and taxation relief where possible. The contractor receives a fixed payment per hectare and after the sale of the final crop, the farmer receives a fixed payment and any remainder is then divided between the farmer and contractor according to an agreed ratio.
Seek out professional advice
At Forge Property Consultants, our role is to mediate and help each side understand the value of what the other brings to the partnership.
We can write up a budget projection, draft contract agreements and profit share terms, if certain targets are met.
If you’re thinking of entering into a contract farming agreement, then don’t work in isolation. These agreements can be complex and are legally-binding, so you want to make sure you are aware of what is expected of each party in the agreement. Talk to our experts, as we may have contacts who are also looking for like-minded partners, to forge successful new business ventures.