How to tender for a good contract farming agreement
The season for offering, renewing and renegotiating arable Contract Farming Agreements (CFAs) is opening, with a background of rising costs all round, falling BPS receipts and policy uncertainty.
All this makes balancing the interests of farmer and contractor a tricky task, following a season when some contractors were caught out by rising fuel prices and other costs.
This resulted in some cases in a one-off payment to recognise this pressure, others already had a fuel escalator in place for this eventuality.
We consider how to tender for contract farming agreements that are fair for each party.
See also: CFAs need new approach in light of BPS phase out
Traditional arable CFA – how does it work?
Farmer provides land and buildings, where buildings are available
Contractor provides labour, machinery and management expertise, and carries out arable operations and crop management
Farmer retains trading status for income and capital taxes – and must remain involved in management decisions on cropping and land use, so regular meetings should be held and decisions documented
Separate bank account opened by farmer (usually called the No 2 account) for all spending relating to the agreement and crop income
Contractor receives a fixed payment/acre (contractor’s charge or first charge) for labour and machinery input, usually paid quarterly. Paid before the farmer’s fixed sum or first charge
Farmer is paid a fixed sum/acre, with any remaining surplus after sale of crops divided between farmer and contractor in agreed proportions, which vary between agreements.
Some include a small proportion first tranche payable 100% to the contractor. Many split the main part of the surplus 50:50 or close to this.
A further tranche or “super surplus” may apply in very good years which would usually be shared in heavy favour of the farmer.
Volatility in prices, costs and yields has dealt this expectation a few blows in recent years, so while the general aim is to keep agreements simple, bumps in the road are increasingly being catered for.
The principles of arable CFAs are generally well known, with BPS usually included in the agreement and an overdraft account set up by the farmer to fund the cropping and payments to the parties.
The aim is to create the largest pie possible in which each party can share. It’s also important to be clear about responsibilities and to cater for new policy developments.
“In new agreements, where there is a degree of uncertainty, each is slightly different, with the area under stewardship or other schemes needing to be catered for, as well as the associated management costs,” says Andrew Wraith, head of Savills food and farming.
This means in many cases that there is a basic contractor’s fee, calculated for each crop, plus a fee for scheme work.
Contractors need to cost their own management time associated with the agreement and beware of mission creep, although this can work both ways, says Mr Wraith.
Examples of this include added responsibility for jobs such as grain store monitoring.
“The basic contractor fee is rising on the back of labour and machinery cost increases,” he says, with landowners largely sympathetic and recognising this.
There have been some superb CFA results from the 2022 harvest, says Mr Wraith, and budgets don’t look bad for the current year.
While uncertainty has always been a feature of farming, the ups and down of the past few years mean that agreement terms often include a clause offering the option to review if there is a material change during the term of the agreement.
However, there then needs to be subsequent agreement on what constitutes a material change.
Decoupling BPS from the land and the requirement to farm from 2024 is prompting a debate about whether BPS should continue to be included in CFAs.
Among a sample of consultants contacted by Farmers Weekly on this point, most favoured the delinked BPS being included.
Who gets what?
Contractor fees on combinable cropping agreements are generally in the range of £309-£358/ha (£125 to £145/acre), say advisors, although there are outliers beyond this. Broadly, farmers’ charges are similar.
Bidwells partner Ian Ashbridge’s main advice is also to make the cake as large as possible, partly through being proactive about environmental schemes, and that neither party should be greedy.
“The contractor’s charge should cover operational and management costs, but not be inflated so that part of it is profit not yet made,” he says.
“Equally, the farmer’s prior charge has to be set at a fair rate. We see increasingly that these two are broadly in line with each other.
“Contractors need to recognise that the CFA land is someone else’s farm and farmers must not see the CFA income as rent.
“Some of the best arrangements and returns are where the CFA is a genuine opportunity for the contractor to operate at marginal costs, rather than kitting up to take on extra ground,” he says.
When the new Countryside Stewardship offers came out in 2015-2016, Bidwells used the scheme to encourage more value into CFA pots.
“We used options like AB9, AB1 and SW6 – winter cover crops – and were able to get a lot more value of of the schemes, that’s harder to do with just winter wheat and oilseed rape, but where you have got spring cropping, it can work well.
“You have to treat stewardship like another crop (in the agreements) using different rates for different crops – but it’s not a zero work option and that has to be reflected in the contractor rates.”
Problems can arise where there is an issue on which agreements are silent, says Mr Ashbridge.
John Hartwright of Laurence Gould says that given the background, there must be flexibility in agreements.
“Going forward there will be some downward pressure on farmer’s first charges.
“There has already been some pressure for this to reduce, but high Farm Business Tenancy (FBT) rents, reflecting recent high grain prices, are challenging this,” he says.
“It’s fair to say that it has been relatively easy to get contractor charges up a bit, some agreements have been renegotiated, some are on hold, some have had the divisible surpluses tweaked.”
Mr Hartwright urges contractors not to be tempted to discount their fixed costs to get the job, relying on the profit share to make up for this.
“Last year we saw power costs go up by £100/ha in a matter of two or three months – illustrating the danger of cutting fixed costs too low in a tender and relying on the divisible surplus to help you out.”
CFA term lengths generally remain at three-to-five years, but with more flexibility within the term to account for the uncertain background for combinable cropping.
These are built in to many existing agreements so that if the costs exceeds what is included in the basic contractor fee, then a top up is triggered.
One way to approach it is to calculate fuel use/ha by season, for example, says Mr Wraith.
This will vary with the system and cropping but the average price paid can then be applied in the correct proportions.
What’s in – and what’s not
Agreements need to be clear about what work the contractor’s basic fee includes – for example:
- Hedge cutting, which can be an expensive operation and is sometimes carried out on a one-off basis, but then becomes an annual operation by the contractor
- Ditch maintenance and clearing – again this may start as a one-off but become regular
- Grain store management – is this included?
- Management of schemes – the operations on the ground associated with schemes may be included, often as a separate element to the basic contractor fee, but there could be additional management time