Farmers Weekly’s Business Clinic experts offer free advice on legal, finance, tax, insurance, farm management and land issues. Here Duncan Winspear, farm management consultant at Savills Agriculture, explains how contract farming agreements work in the livestock sector.
Q: I struggle to retain good staff for my beef and sheep enterprise and have heard that some people have moved to contract farming agreements (CFAs) to overcome this and to incentivise performance. How do these agreements work?
A: The principles of contract farming agreements (CFAs) are well established in the arable sector, but they can also work well on stock farms. Any agreement must be properly constructed so that the farmer continues in full control of the main agricultural business and is treated as a farmer for tax purposes.
Livestock CFAs tend to be longer term than arable agreements because of the time it takes to reach production goals with breeding animals. Many are set up to run for five years or more although there is flexibility.
The benefits of a CFA include allowing the farmer to step back from some of the hands-on work and day-to-day management. Such agreements can be very effective in encouraging capable staff to develop with the farm, as it allows them to have their own livestock contracting business and also to benefit directly from how the farm business performs.
Under a CFA the contractor provides all labour and machinery needed to run the livestock enterprise day-to-day and usually the more hands-on aspects of management. To cover the cost of this, the contractor invoices the agreement an agreed basic fee, normally monthly or quarterly.
The farmer provides the land, buildings and any fixed equipment used by the livestock, also the funding needed to buy all inputs for the unit, such as fertiliser, concentrates, vet and medicines. This is handled through the contract farming account, often known as the number two account. This also pays fixed costs which are directly attributable to the livetsock enterprise covered by the CFA, such as insurance, electricity and repairs. For this the farmer receives what is known as a first charge from the account.
Usually the farmer owns the breeding livestock in a CFA, however this is flexible. Sometimes the contractor can own a proportion of the stock. These animals would then be hired to the agreement on a headage basis (with their offspring included in the CFA). This can be a way for the contractor to build equity and for the farmer to release capital.
To calculate the return from the CFA, all income from livestock (finished, store or breeding animals, wool or milk) plus any subsidy income that is agreed to be included – is totalled. From this all farming costs such as feed or bedding are subtracted. These include the contractor’s basic fee, any first charge to the farmer and any livestock hire charges.
As production for livestock CFAs can be year-round (unlike arable CFAs where there is a clear harvest), an annual valuation of on-farm stocks like silage and straw is needed. This also needs to reflect annual livestock valuation changes.
After all costs and charges have been taken and valuation changes accounted for, what is left is known as the divisible surplus, which the two parties share. The split varies between agreements, but must be fair, reflecting what the farmer provides, as well as the input and work of the contractor. This ensures that everyone is incentivised to keep moving livestock performance and the farm forward, in turn leading to long-term benefits for both sides.
Do you have a question for the panel?
Outline your legal, tax, finance, insurance or farm management question in no more than 350 words and Farmers Weekly will put it to a member of the panel. Please give as much information as possible.
Send your enquiry to Business Clinic, Farmers Weekly, RBI, Quadrant House, The Quadrant, Sutton, Surrey SM2 5AS.