Contract farming

Oh aye you can make an absolute fortune! You not see all the farmers going round in new range rovers? Or is that the oil guys?

Ali said:

can someone explain how it works and can you make money under such an arrangement

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difficuilt.

You as the contractor charge a fixed fee to plant the crop and see it through to harvest.

The farmer (the person that owns the land not you the contractor) charge a fixed fee (or rent but we cant call it that as its not guaranteed if you don't make a profit)

ALL costs come out of a shared account between you both.

You split the profit (usually in favour of the contractor to 'encourage' him to work harder)

binbusy said:

You as the contractor charge a fixed fee to plant the crop and see it through to harvest.

The farmer (the person that owns the land not you the contractor) charge a fixed fee (or rent but we cant call it that as its not guaranteed if you don't make a profit)

ALL costs come out of a shared account between you both.

You split the profit (usually in favour of the contractor to 'encourage' him to work harder)

Click to expand...

That's basically it. The farmer wants the benefits of having an actively trading business but not the hassle of day to day activity. There's tax benefits too, esp IHT.

Contractor charges a fee below the cost of production so they are incentivised to generate a sustainable profit to supplement their income from the profit share. Both farmer & contractor take a fixed fee (contractor's should be paid first if the worst happens) then split the rest. In arable contracts the first £100 - £200/acre of profit should be split heavily in favour of the contractor. Above that shares are frequently 50:50 if there is another tier above that where the farmer sees the bulk of any superprofits. It all depends on the risk levels taken by each party & no 2 agreements are exactly the same. Contractor provides machinery, fuel, labour & admin at his own expense. Farmer provides working capital, grain storage/buildings. Grain marketing & purchasing is agreed jointly but contractor does logistics. Agreements run from 3 -10 years in duration.

I don't know how this works with livestock but there are such agreements in place - look at the share milking market in NZ for a good example of that.

Working capital for seed/fert/sprays should be funded by the farmer & income should be received by the farmer too. Frequently this is into a dedicated account. The farmer has to be seen to be taking some of the trading risk or it is a sham form of tenancy dressed up to suit the farmer. I'm sure that the farmer is thinking of a rental equivalent when such agreements are set up - HMRC are taking an interest in this kind of thing as it is a blatant tax dodge.

Can a contractor make money from contract farming? Yes, if the fees & profit shares are reasonable enough to both parties. Around here every young farmer is fighting his neighbour to expand at any cost so tenders are very generous to compete with all this ambition. Unless the arable contractor can see £200/acre return in an average year then I'd say that they'd be better off staying in bed IMO. I think that there's a lot of busy fools about & the market is stacked in the landowner's favour, but there are plenty of farmers about who do look beyond next year's accounts, especially institutional investors who have no intention of farming it themselves.

£100/£200 acre profit!? What would the contractor be charging per acre for work if anything.

Sorry. Net contractor return £200/ac, with net landlord return of approx £125/ac allowing for ELS, SFP and including all fees for both parties. It will vary from year to year obviously. That was just an example.