Contract farming: Think carefully

Thirty years ago, Limited Partnership tenancies were in vogue. The legal and accountancy world had agreed that these were a way for individuals who did not want, or did not have the funds, to be involved in farming without the risk of creating a tenancy.

With the change in legislation, these types of farming arrangement are no longer possible. However, over the last few months we have seen an increasing number of contract farming arrangements being considered as alternatives to tenancies.

Contract farming agreements are seen as a way to maximise flexibility for the land owner or farmer, but are they as good as they seem?

They are most common on arable units but can be used for stock farms, although these are less common.

Anybody considering a contracting arrangement must consider carefully why they are doing it. The benefits for owners entering contracting arrangements range from avoiding creating a Modern Limited Duration Tenancy (MLDT), Brexit uncertainty, retaining subsidy payments and obtaining a guaranteed first payment from the contracting account while at the same time retaining an “active farming” role in the farm for tax purposes.

For the contractor the benefits of economies of scale, a contracting and management fee and the prospect of a share of the divisible surplus (if there is one) are the incentives.

One agreement I have seen was structured in a way that there could never be a divisible surplus.

For others contracting is a way of holding on to land while they decide what to do with it if there are no obvious family members to take on the farm. If this is the driver the option of selling now when land values are still relatively strong should be seriously considered.

If considering a contracting arrangement, it is essential to be clear that it is being done for the right reasons. It is all very well retaining the BPS and a first charge on the contracting account, but who pays to maintain and improve the fertility of the farm? If a contractor is being pushed to increase output, the first things to suffer are soil structure and environmental issues.

Michael Gove has made it clear where he sees subsidies heading, and the Scottish Government will no doubt have to follow Defra rules. The time has come to focus on environment issues.

As we strive for greater efficiency and larger machines, the basics of soil fertility and environmental matters can get overlooked. I know of a farmer locally who recognises this and is in the process of increasing cattle numbers and the area of grass so that they have more organic matter to put back on the land as well as a longer grass break in their rotation.

If considering contract farming, think carefully. As ‘the farmer’ why are you doing it? And as contractor, make sure that you are not just taking more land for the sake of it or securing potato ground. Read the contract carefully and take advice.

Malcolm Taylor is head of land management at Bell Ingram.

Contracting can be a way of holding on to land while deciding what to do with it if there are no obvious family members to take on the farm.