Wednesday, September 26, 2018

Consider collaborations other than contract farming

June 29, 2018 by  
Filed under News & Business

Expert view: The industry must embrace collaboration other than contract farming agreements where structures such as share farming are true joint ventures, says Gary Markham.

Contract farming arrangements have dominated joint venture agreements for many years in the arable sector, while share farming has been considered to mainly applied to livestock joint venture arrangements.

Yet our latest harvest benchmarking shows that the average farm business made little or no margin from contract farming agreements for the second harvest running for 2017. Margins were as low as £25/ha from harvest 2017 while £110/ha was lost from harvest 2016.

This was mainly because of increasing labour and machinery costs, with harvest bonus payments reducing to nil in some contracts. It is perhaps time that industry embraced collaboration other than contract farming agreements.

Defra recently announced £10m to become available this autumn to support the formation of innovative collaborative and cooperative structures. Inheritance tax is under review and joint ventures must be robust instructed to avoid any risk of loss of the available relief.

There is ample evidence that correctly structured share farming arrangements are fully accepted as a trading farming business. But the HMRC is not so positive about contract farming agreements where the majority of the return to the landowner is a fixed payment – as is often the case now.

We currently have many arable businesses locked into a treadmill of high input and output systems supported by support. And many farmers have to rely on outside or rental income to support their arable enterprises.

Regardless of Brexit, it is very difficult to unlock these businesses and restructure them into a more robust system. Current results from the 2017 harvest show the average farm losing almost £100/ha before their basic payment and other income.

The rural business profit – which includes diversified income but before rent and finance – is £312/ha of which the basic payment is  is £225/ha. This means the industry will need to adapt into more collaboration – particularly small to medium-sized arable businesses.

It is important not fall into the trap of trying to grow farm businesses through contract farming arrangements. Instead, it is preferable to use true joint ventures such as machinery syndicates or share farming arrangements.

Share farming arrangements can be employed in many situations depending on the individual circumstances. There are many examples of them working successfully having being tailored to the situation in question.

These arrangements can involve a contractor providing contracting services to a farmer; two or more farmers combining their arable enterprises; or two or more farmers combining their arable enterprises in association with a machinery syndicate arrangement.

Whatever you decide, it is important to realise there is a move in the industry – partly government driven – to restructure agriculture. A joint venture such as share farming or a machinery syndicate can be an idea work vehicle to achieve this.

Gary Markham is director for farms and estates at Land Family Business. For details, call 07970 794495 or visit www.landfamilybusiness.co.uk

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