Advice on moving into contract farming agreements

Contract farming agreements (CFAs) offer a way to maintain the income and capital tax advantages of being a working farmer, while reducing the demands of day-to-day management and working capital requirements.

Poor arable performance in 2023 and the need for investment in fixed equipment or machinery on some farms are among the reasons for recent decisions to opt for this type of arrangement.

Higher interest rates, and those rates staying raised for longer than expected is another factor. Retirement is a further driver, combined, in some cases, with a lack of successors.

See also: What’s behind the rise in farmland sales in 2024

The acreages on the market range widely, but several significant new agreements are being offered for an autumn 2024 start.

These are mainly in the arable sector, but include mixed farming agreements and in some cases, are on arable land where there is a requirement to bring livestock in as part of the mix.

Charles Whitaker, managing partner of Brown & Co, says the firm is working on a good number of new arable CFAs, with a sharp focus on operating costs and cost of production, resulting in decisions to put land on contract.

“2023 was a very difficult year and 2024 doesn’t look much better,” he says. “Net profitability has changed so much.”

Decisions to put significant acreages of some farms into the Sustainable Farming Incentive (SFI) has altered cost structures, prompting rationalisation of machinery and a move to a CFA.

“SFI has taken up significant cropped areas and not all contractors like that, but it’s better for everybody,” says Charles.

“Our general approach is to put all stewardship money into the agreements. The land still needs managing and everybody is better off that way.”

Impact of changing policy

The changes brought about by SFI, now limited to some extent by Defra’s 25% acreage cap on six particular actions, along with reduced cropping in some Countryside Stewardship agreements and increased operation costs, has altered the proposition for many contractors.

In some cases, changes have taken place mid-agreement.

“If they have not already done so, contractors are pushing for a bigger first charge to cover their increased costs,” says John Hartwright, a director of consultant Laurence Gould.

In the past, the Basic Payment Scheme (BPS) payment underpinned the farmer’s prior charge. With that going, there has also been pressure to reduce the farmer’s prior charge, but not by as much as the drop in BPS, says John.

Both of these changes may prompt a review in the structure of the divisible surplus payments.

There is also some discussion about how SFI income will be treated in agreements.

“If you’re looking at a scenario where land is being taken out [of a CFA], for a permanent SFI option, as long as it’s all small, difficult fields or parts of fields, then there probably wouldn’t be much resistance to this from the contractor. If it’s 25% of the acreage, that’s more of a problem.

“Where options are rotated, taking out poor margin, higher risk break crops in favour of SFI actions such as legume fallow, that’s probably better than busting a gut to produce a poor break crop,” says John.

“That then begs the question of whether the SFI cash should go into the CFA pot or not.

“If it is in the agreement and you have, say, a legume fallow, then you need to consider what the contractor should charge for managing that legume fallow, the cost to drill it and how often it will need topping. Everything needs careful costing but to some extent it’s a moving target.”

Bespoke agreements

With a changing policy, support and profitability background, agreements are becoming more bespoke to reflect the nature of the operations and the risks for farmer and contractor.

“There needs to be some flux in the agreement. Increasingly, we are seeing separate contractor charges by crop. It has been going that way anyway,” says John.

He suggests that where land is taken out of a CFA temporarily and put into an option such as a wild bird mix, consideration should be given as to how this might be managed if it is brought back into the CFA area, so that the contractor is not being loaded with extra work and disruption to the rotation is minimised.    

Simon Britton, head of agri business consultancy at Knight Frank, says there are definitely more CFA opportunities coming onto the market, and the firm is itself involved in drawing up more agreements.

Challenges

“There are succession, profitability and investment issues,” says Simon, “and there is a whole suite of potential solutions, from farming in-hand to a farm business tenancy, with CFAs, machinery sharing, environmental agreements, and stubble-to-stubble contracts in between.”

He echoes the need for flexibility and careful assessment of the figures. SFI actions and other agreements and measures have complicated the calculations.

“If an SFI action has a low impact on the operation of the CFA, then I suggest it stays out of the agreement, for example taking out 20 acres of field corners or margins in a 500-acre agreement, then keep it out and reduce the farmer basic return to reflect the impact on the agreement.

“However, if it impacts the way the CFA normally functions, for example reducing stocking or fertiliser rates, then you may have to include the relevant revenue from the management prescriptions and look at the impact on the performance of the agreement.”

In some cases, changes are being negotiated to CFAs mid-agreement, says Simon, but this relies on the basic premise of a good CFA, which is one of shared common objectives, trust, and good communication, he stresses.

Investor impact

There is continued interest in farmland investors from outside the sector, both by private individuals and institutional interests.

Some new farmland owners favour CFAs because they want not only the tax advantages of working farmer status, but also to be involved in the way the land is managed.

They generally live on the holding and like the formality of a well-drafted and well-managed agreement, says Simon.

“They are often business people who will examine the figures closely, and this means that, in some cases, contractors are having to become more sophisticated and, more importantly, adhere to the rules of the agreement.”

These owners, along with some others moving to a more regenerative approach, increasingly want livestock to be part of the system on their land.

Illustrating the evolving nature of CFAs, Simon is drawing up a minimum five-year 450ha agreement on a predominantly grassland farm with 150ha of arable, alongside a suckler herd and breeding sheep flock.

This is catered for under one agreement, but with the arable operations covered by a conventional CFA approach, ie. a contractor’s basic charge, while the sucklers, grassland and sheep management are being carried out by the contractor for a fixed monthly fee.

The output of all of the enterprises is included in the resulting divisible surplus and, after the farmer’s basic charge, this is then split 60:40 in favour of the contractor.