Periodically reviewing joint ventures advised as agricultural policies change

Proposed changes to inheritance tax and the transition from direct farm subsidies to environmental payments have highlighted an important need to keep contract farming agreements (CFAs) under review.

CFAs have been widely used in arable farming for 25 years or more and are now becoming commonplace in dairy and livestock businesses as these sectors closely align with cropping systems.

A CFA is a true joint venture between two parties – the farmer provides the land, buildings and infrastructure while the contractor brings the machinery, staff and management expertise to the arrangement, the two working together using available facilities to maximise the potential from a holding.

Although they are not as commonplace in dairy and livestock, Brown&Co’s head of agricultural business consultancy, Paul Waberski, told the first in a series of Brown&Co podcasts that this situation is changing.

“They are increasing in number as we see more joined up work between arable and livestock farming businesses,’’ he said.

The principles are the same as for an arable agreement with the farmer generally providing the infrastructure, the land, and possibly some of the livestock.

Thought needs to be given on how replacement stock are accounted for in the agreement and also the longevity of the arrangement.

“You need to think about replacement policies and how one deals with the livestock and who owns them, it is a lot more straightforward with a crop of wheat or barley,’’ said Mr Waberski.

Brown&Co manages over 160 CFAs across 90,000 acres.

Speaking to the podcast, facilitated by James Brown, agricultural business consultant at Brown&Co’s Banbury office, and Olivia Burfoot, agricultural business consultant in the Leicester office, Mr Waberski advised that periodically reviewing agreements is important.

Some agreements Brown&Co manages have been in place for 25 years and in the intervening years there have been many changes, most recently to farm support payments and to taxation.

“The great advantage of these agreements is that they are dynamic, they can change with circumstances,’’ Mr Waberski pointed out.

It is becoming more common to include environmental schemes in the agreement, to ensure the contractor is being fairly rewarded for their work.

Another consideration in existing arable agreements is the growing pressure in recent years on margins for break crops and farmers opting instead for Sustainable Farming Incentive (SFI) actions. The rollout of anaerobic digestion plants has generated demand for different types of crops too.

“One should review agreements to ensure they do facilitate the inclusion of SFI or some alternative crops,’’ Mr Waberski recommended.

“There is also the discussion to have with the contractor about what the rates are for an SFI crop versus one of the more traditional cereal crops so it is a very healthy principle to review agreements and keep them in check with what is going on within the market.’’

An important starting point to any CFA is to seek professional advice, not least because there are so many variables.

“Is there a tenancy, does your tenancy permit a CFA? What does it look like as far as a budget goes, what do the potential returns look like and how is it going to help with your potential succession plan?’’ said Mr Waberski.

“Even if the farmer knows who the contractor is it is important that they do get professional input to ensure that the agreement is structured correctly.’’

For contractors, he recommends they make it known locally that they are looking for opportunities, including to professionals operating in this sector.

“It is a great way of growing your business and helping your succession plan, so make it known that you are looking for such opportunities,’’ said Mr Waberski.

One of the advantages of CFAs for contractors over a farm business tenancy agreement is cashflow, he added.

“The great advantage of CFAs is that you don’t have to pay a rent upfront on the land – the farmer funds the land, you have to provide the staff, the machinery, and your skills.

“It could be a succession solution to your business by spreading those costs and bringing the next generation into a growing concern.’’

In conclusion, Mr Waberski sees CFAs as a tried and tested formula that has worked well in the industry for over 25 years.

But, he cautioned: “There are some complexities around setting up an agreement and agreements do need to be reviewed every few years.’’

For more information on joint ventures, please contact your local Brown&Co office

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