Contract Farming Agreements could pay different rates for different crops
A new generation of Contract Farming Agreements designed to maximise flexibility are likely to emerge in response to changes in government support and the introduction of more environmental measures into the arable rotation.
Richard Means, director in the farming department of Strutt & Parker, says a well-structured CFA will remain a very good vehicle to manage a farm as both parties can be incentivised, their skills utilised and economies of scale realised.
But the impending reduction in BPS payments, alongside the introductions of ELMS, will undoubtedly have an impact on the set up of future agreements because of their impact on crop rotations.
“Ultimately, the farmer must still be seen to be taking the risk from growing the crops and the contractor needs to be fairly rewarded for having the retained running costs of labour, machinery and the management skill that they bring to the arrangements,” he says.
“Couple this with larger environmental schemes that might come into the rotations, then we will see more flexible arrangements where each cropping option has different rates for both the basic contractor’s charge and farmer’s retention.
“While that will make it more complicated to administer, it may well be the fairest way of dealing with the changes that are coming.”
The trend over the past two or three years has already been for contractor’s charges to rise as they seek to lock into higher guaranteed returns to reflect higher labour and machinery costs.
The contractor’s charge is the payment per hectare that a contractor receives for providing labour, machinery and management expertise to farm the land under the CFA. It is essential that any contractor has a detailed understanding of their own costings to be able to understand and recognise what return they are achieving through these agreements.
The farmer’s retention is the charge made by the landowner for providing the land and the buildings.
2019 CFA results
Provisional results from Strutt & Parker’s annual survey of Contract Farming Agreements (combinable crop agreements only), show total income to the farmer for Harvest 2019 averaging £392/ha, while income to the contractor is £395/ha – both returns above the five-year average.
The survey is based on the results of 60 agreements covering more than 12,000ha of combinable crops in England, mainly in the East of England, East Midlands and South East.
“The 2019 year produced some good yields and better crops compared with the drought-hit harvest of 2018. However, this large wheat crop put prices under pressure and so limited the increase in crop receipts,” says Mr Means.
“Slightly higher variable and fixed costs were partially offset by higher than expected Basic Payments, so overall net margins were up on the previous year.”
Strutt & Parker Harvest 2019 provisional CFA results (combinable crops agreements only) – A summary
· Total receipts from crops sales, BPS and stewardship payments higher than in 2018 at £1,332/ha, due to higher yields.
· Average variable costs (£439/ha), up on 2018 levels and the highest for four years
· Fixed costs (£112/ha), compared to £97/ha in 2018.
· Contractor’s charge broadly similar to 2018 at £276/ha, leaving a net margin of £506/ha – the highest since 2014.
· Farmer’s retention £285/ha (£270/ha in 2018), leaving an average divisible surplus of £220/ha (£223/ha in 2018).
· Total returns to the farmer average £392/ha (£374/ha in 2018), which is well above the five-year average, but there is wide variation. The income expected for the middle 50% of farmers ranges from £331 to £444/ha.
· Contractor’s total income averages £395/ha (£398/ha in 2018), which is above the five-year average. However, the income expected for the middle 50% of contractors ranges from £343 to £430/ha.
Strutt & Parker publishes separate analysis of CFA agreements which include roots, which shows higher returns for both the farmer and the contractor in 2019.
Strutt & Parker Harvest 2019 provisional CFA results (agreements including root crops) – A summary
· Total receipts from crops sales, BPS and stewardship payments similar to 2018 at £1,361/ha.
· Average variable costs down from £404/ha in 2018 to £382/ha in 2019.
· Fixed costs £162/ha (£193/ha in 2018).
· Contractor’s charge at £230/ha (£249/ha in 2018), leaving a net margin of £587/ha.
· Farmer’s retention £281/ha (£286/ha in 2018), leaving an average divisible surplus of £302/ha.
· Total returns to the farmer averaged £440/ha (£397/ha in 2018).
· Contractor’s total income was £381/ha (£375/ha in 2018).
For a detailed breakdown of receipts, costs and income to the farmer and contractor from CFAs over the past decade, please request a copy of the full English Contract Farming Agreement Survey results.
The 2019 provisional results are based on estimates of crop yields and financial performance as at 31 May 2020. Final results based on actual yields, income and costs will be produced in late 2020.