Professional services
Consider collaborations other than contract farming
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.
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ontract farming arrange- ments have dominated joint venture agreements for many years in the arable sec- tor, while share farming has been considered to mainly applied to livestock joint venture arrange- ments. Yet our latest harvest bench- marking shows that the average farm business made little or no margin from contract farming agreements for the second har- vest running for 2017. Margins were as low as £25/ha from har- vest 2017 while £110/ha was lost from harvest 2016. This was mainly because of in- creasing labour and machinery costs, with harvest bonus pay- ments reducing to nil in some contracts. It is perhaps time that industry embraced collabo- ration other than contract farm- ing agreements.
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The industry will need to adapt into more collaboration.
Defra recently announced £10m to become available this au- tumn to support the formation of innovative collaborative and co- operative structures. Inheritance tax is under review and joint ven- tures must be robust instructed to avoid any risk of loss of the avail- able relief.
There is ample evidence that correctly structured share farming arrangements are ful-
Improved crop prices shield rising fixed costs
Average crop prices rose by 9% leading to higher gross margins for the 2017 harvest year – but rising fixed costs dented the im- provement of overall returns, says Savills.
Despite rising fixed costs, higher crop prices and general- ly lower variable costs resulted in costs making up a smaller pro- portion of the crop price in 2017, according to the firm’s sixth ara- ble benchmarking survey which covers 20,000 hectares of combi- nable cropping land.
There are often more suitable joint ventures than contract farming, says Gary Markham.
ly 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 ara- ble businesses locked into a tread- mill of high input and output sys- tems supported by support. And many farmers have to rely on out- side or rental income to support their arable enterprises. Regardless of Brexit, it is very difficult to unlock these business- es and restructure them into a more robust system. Current re- sults from the 2017 harvest show the average farm losing almost £100/ha before their basic pay- ment and other income. The rural business profit –
which includes diversified income but before rent and finance – is £312/ha of which the basic pay- ment is is £225/ha. This means the industry will need to adapt into more collaboration – particu- larly small to medium-sized ara- ble businesses. It is important not fall into the trap of trying to grow farm busi- nesses through contract farming
arrangements. Instead, it is pref- erable to use true joint ventures such as machinery syndicates or share farming arrangements. Share farming arrangements can be employed in many situa- tions depending on the individu- al circumstances. There are many examples of them working suc- cessfully having being tailored to the situation in question. These arrangements can in-
volve a contractor providing con- tracting 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 arrange- ment.
Whatever you decide, it is im-
portant to realise there is a move in the industry – partly govern- ment driven – to restructure ag- riculture. A joint venture such as share farming or a machinery syndicate can be an idea work ve- hicle 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
Contract farming agreement operations continue to benefit from lower fixed costs than in hand operations, says Savills. But a rise in contractor returns of £65 per ha compared to har- vest 2016 has increased the cost to the farmer by 19% for the 2017 harvest year.
The range between the high- est and lowest power, machin- ery and labour costs suggests a strong case for businesses to an- alyse performance stringently – and determine the most appro- priate business structure while still being able to carry out work on a practical timely basis.
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There is a balance to be had between keeping costs down and having good staff
Headline figures suggest mod- est inflationary increases in la- bour costs, but actual costs to re- tain or attract new staff can be much higher causing cost spikes in some of the businesses contrib- uting to the survey. Alex Bragg, head of food and farming for Savills in the East said: “When it comes to labour there is a balance to be had be- tween keeping costs down and having good staff, particularly at a time when it can be difficult to find skilled and motivated labour. “It’s all about optimising the cost against having the right cal- ibre of labour for the high-tech machinery used today.”
JULY 2018 • ANGLIA FARMER 61
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