Contract farming is a relatively new concept and has grown significantly in popularity in the last decade or so.
Contract farming provides opportunities for farmers to develop their businesses in fresh and innovative ways as well as giving access to specialist skills, which can make it a highly attractive option. That said, it doesn’t always come cheap.
So might contract farming be an option for your farm, or should you stick with in-house arrangements?
Broadly speaking, the advantages of contract farming are that by working with either neighbouring farmers, contract farming companies or a single contractor, you can often achieve results and outcomes that simply might not otherwise be possible. No matter whether it’s a case of needing an extra few pairs of hands, or additional expertise, contract farming can bring welcome assistance for many farmers.
Working normally in exchange for a basic payment, plus an incentive payment based on results, contract farmers’ responsibilities and duties need to be well defined, but this can be achieved with a relatively simple agreement. Sharing responsibilities for meeting regulatory requirements, contractors and farm owners or tenants enter into an arrangement whereby roles, expectations and rewards are clearly defined.
The farmer is responsible for providing the land and buildings and what the contractor will bring to the table depends on the needs of the specific business. By entering into such arrangements, the farmer avoids the need to invest in machinery, saving on capital costs and depreciation charges. What’s more, the farmer is able to work in the knowledge that while the basic cost of the contract farmer needs to be met, any additional costs can be based on an agreed level of performance. Working this way means that the farmer retains control of the financial affairs of the business and claims SPS/ELS on an annual basis, while enjoying the economies of scale that are opened up by this type of arrangement.
When it comes to taxation, there are also advantages of taking the contract farming route. With Business Property Relief, Income Tax and VAT benefits that are more marked than with Farm Business Tenancy arrangements, farmer owners need not fear rises in taxes due to this way of working.
But is contract farming for everyone?
Not surprisingly, the answer to that is a clear “No”. Like everything in life and everything in business, the effectiveness of working this way depends on your specific needs and aspirations.
The only way to decide whether or not contract farming might be right for you is to look at your internal strengths and weaknesses as well as the market opportunities and threats that are at play in your particular sector. If you’re missing out on real and potentially profitable opportunities either due to lack of skills in a particular area or the inability to raise capital for required machinery, then it may be the way to go. However, like anything that might impact on your independence or profitability, it’s well worth looking closely at the detail before making the final decision.
If you’d like to explore the pros and cons of getting involved in contract farming, give us a call on 01763 247321? We have extensive knowledge of the ups and downs of such arrangements and can help you make the best decision for your particular business.