Contract farming agreements as a method of land management have much to commend them, according to Smiths Gore partners Alastair Deighton and Douglas Ogilvie.
Based in the company’s Perth office, they have been involved in setting up and supervising such arrangements for many years.
Douglas notes that the format has remained very similar for 27 years.
He currently looks after 22 agreements spread over 60,000 acres, with around 7,000 of these acres arable and the remainder on hill units which between them carry 12,000 ewes and 200 suckler cows.
The concept involves two partners.
The ‘farmer’ is essentially the person in control of the land, either through ownership or as a tenant.
He or she supplies the land, any fixed equipment such as a grain dryer or a dairy parlour, and the Single Farm Payment as well as being in control of short and long-term farming policy.
The ‘contractor’ supplies the labour, the machinery, the breeding livestock and of course the expertise required to make it all work.
All of the purchases of inputs and sale of produce are made in a separate account in the name of the farmer, normally known as the ‘Number 2 account’. This might be funded by the farmer but will typically use an overdraft to fund activities until crop or livestock income arrives.
Alastair pointed to the importance of the farming policy not being restricted by an inadequate overdraft facility, but noted that in his experience banks are normally relaxed about funding such operations.
Alastair had been involved in setting up contract farming arrangements in the south of England, where most of the uptake had been from large estates changing from in-hand operations. Often contract farming, as opposed to letting out the land, has appealed for tax reasons.
“In Scotland contract farming is increasing, but often for different reasons relating to perceived landlord/tenant problems,” he said.
The income-sharing arrangements have undergone some refinements over the years to better cope with market volatility.
In basic terms all the fixed and variable costs are deducted from the annual income, including the contractor’s basic fee.
This leaves a net return from which the farmer’s basic fee essentially equivalent to a rent is then paid out.
This hopefully leaves what is known as a ‘divisible return’, most of which will typically go to the contractor. A split of 90% to 10% is typical.
The more recent refinements, however, see a ceiling placed on this so that in a good year any divisible surplus over, for example, £160 per acre will be split equally between the two parties.
Douglas said: “The great thing is that these agreements can be changed if the formula is not working.
“A contract farming agreement is subject to the laws of contract but is outwith land reform or agricultural holdings legislation.
“I believe the key to a good contract is that it should be simple, flexible and easy to administer.”
Contract farming is sometimes criticised by tenant farming organisations as being a poor alternative to either traditional or limited duration tenancies, but Douglas begs to differ.
“I see it as helping young people to start farming because the farmer supplies not only the land and the banking facility but in some cases the breeding livestock as well.
“It can be a very good way for a young person to experience farming on a good scale,” he said.
He also dismissed any accusation that these were necessarily short-term arrangements.
“In 27 years I can actually only think of two contracts that have come to a premature end, and in both cases that was because the farms were to be sold. Most contracts are initially set up for three to five years, but I have one which has now run for 15 years.”
Some contracts are inter-generational within a family, with a younger member taking on the contract.
In other cases it might be a tenant or owner-occupier who wants to take things easier or pursue an additional career by letting a contract partner do the outside work.
The newly reformed CAP might well make contract farming more popular, especially on large hill units where there is a need to establish active farming activities.
“We are seeing more interest at the moment around stock units. But for all types, demand from contractors is running ahead of the supply of farms,” Douglas concluded.