Contract farming agreements – what to consider

The season for offering, renewing and renegotiating arable contract farming agreements is opening, with a background of rising costs all round, falling Basic Payment Scheme receipts and policy uncertainty.

All this makes balancing the interests of farmer and contractor a tricky task, following a season when some contractors were caught out by rising fuel prices and other costs.

In some cases this resulted in a one-off payment to recognise this pressure, others already had a fuel escalator in place for this eventuality, or have introduced one.

See also: CFAs need new approach in light of BPS phase-out

Fair returns

Good agreements will provide a fair return for both parties.

Volatility in prices, costs and yields has dealt this expectation a few blows in recent years, so while the general aim is to keep agreements simple, bumps in the road are increasingly being catered for.

The principles of arable contract farming agreements (CFAs) are generally well known, with the Basic Payment Scheme (BPS) usually included in the agreement and an overdraft account set up by the farmer to fund the cropping and payments to the parties.

The aim is to create the largest pie possible in which each party can share. It’s also important to be clear about responsibilities and to cater for new policy developments.

“In new agreements, where there is a degree of uncertainty, each is slightly different, with the area under stewardship or other schemes needing to be catered for, as well as the associated management costs,” says Andrew Wraith, head of Savills food and farming.  

This means in many cases that there is a basic contractor’s fee, calculated for each crop, more commonly plus a fee for scheme work.

Contractors need to cost their own management time associated with the agreement and beware of mission creep, although this can work both ways, says Mr Wraith.

Examples of this include added responsibility for jobs such as grain store monitoring.

“The basic contractor fee is rising on the back of labour and machinery cost increases,” he says, with landowners largely sympathetic and recognising this.

There have been some very good CFA results from the 2022 harvest, says Mr Wraith. Original budgets for 2023 have had to be revised and don’t look as good. 

While uncertainty has always been a feature of farming, the ups and downs of the past few years mean that agreement terms often include a clause offering the option to review if there is a material change during the term of the agreement.

However, there then needs to be subsequent agreement on what constitutes a material change.

Decoupling

Decoupling BPS from the land and the requirement to farm from 2024 is prompting a debate about whether BPS should continue to be included in new CFAs.

Who gets what?

Contractor fees on combinable cropping agreements are generally in the range of £296-£358/ha (£120 to £145/acre), say advisers, although there are outliers beyond this. Broadly, farmers’ charges are similar to those for the contractor.

At Bidwells, Ian Ashbridge’s main advice is also to make the cake as large as possible, partly through being proactive about environmental schemes, and that neither party should be greedy.

“The contractor’s charge should cover operational and management costs, but not be inflated so that part of it is profit not yet made,” says Mr Ashbridge, the firm’s head of agriculture and environment.

“Equally, the farmer’s prior charge has to be reasonable and achievable. We see increasingly that these two are broadly in line with each other.

“Contractors need to recognise that the CFA land is someone else’s farm and farmers must not see the CFA first charge as rent.

Some of the best arrangements and returns are where the CFA is a genuine opportunity for the contractor to operate at marginal costs with existing kit, rather than kitting up to take on extra ground, he says.

Bidwells has used Countryside Stewardship to encourage more value into CFA pots.

“We have used options like AB15 (two-year legume fallow) and SW6 (winter cover crops) – and were able to get a lot more value out of the scheme the second time around, in 2020. That’s harder to do with just winter wheat and oilseed rape, but where you have got spring cropping, it can work well.

“It’s wise to treat stewardship like another crop (in the agreements) using different rates for different crops – but it’s not a zero work option and that has to be reflected in the contractor remuneration.”

Problems can arise where there is an issue on which agreements are silent, says Mr Ashbridge.

Flexibility

John Hartwright, a director at consultant Laurence Gould, says that given the background, there must be flexibility in agreements.

“Going forward there will be some downward pressure on farmer’s first charges.

“There has already been some pressure for this to reduce, but high farm business tenancy rents, reflecting recent high grain prices, are challenging this,” he says.

“It’s fair to say that it has been easy to justify getting contractor charges up a bit, some existing agreements have been renegotiated, some are on hold, some have had the divisible surpluses tweaked.”

Mr Hartwright urges caution over contractors discounting their fixed charge to get the job and stresses the need to fully understand the implications of doing so.

“Last year, we saw power costs go up by £75/ha in a matter of two or three months – illustrating the danger of cutting costs too low in a tender and relying on the divisible surplus to help you out.”  

CFA term lengths generally remain at three-to-five years, but with the inclusion of more flexibility within the term to account for the uncertain background for combinable cropping.

Fuel escalators

These are built in to many existing agreements so that if the fuel cost exceeds what is included in the basic contractor fee, a top-up is triggered.

One way to approach it is to calculate fuel use/ha by season.

This will vary with the system and cropping, but the average price paid can then be applied in the correct proportions.