What is Contract Farming
A farming joint venture between two parties, the Farmer (Owner or Tenant) and the Contractor (typically a local farmer or business).
A contract farming agreement is not a partnership; it is a joint venture between two parties. The Farmer is engaging the services of the Contractor and this trading position is preserved insofar as tax, VAT, etc. are concerned. Both parties retain their individual identity as farm businesses in their own right.
- Fixed equipment( i.e.. Grain Store / Dryer )
- New bank account - 'the No 2' - used to pay all outgoing and receive income applicable to the agreement - distinctive from the farmers other business or private costs
Contract Farmer Provides
- Management Expertise
- Additional Storage (where required)
The Contract Agreement sets out:
- The terms of engagement - including length of agreement
- The operation of the contract
- The formula for calculating remuneration to each party - share of the divisible surplus
Benefits to the Farmer
- Avoids creation of tenancy or complex partnerships
- Retains occupation of the farm with associated benefits
- Release of working capital
- Retains taxation relief where applicable
- Benefit from economies of scale
Set out in the contract between Farmer and Contract Farmer
- The Farmers receives an initial fee
- The contractor - would also receive a Basic Fee - usually on £ / Ha basis
Following receipt of the final sales for the harvest year the divisible surplus is calculated. This is the balance left in the No 2 account once all incomings and outgoings are accounted for
- A pre-agreed formula set out in the contract determines the shares to be allocated between the farmer/landlord and contract farmer
- Total return will depend on cropping mix, crop performance, and overall contractor performance in managing the returns / performance.