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Contract Farming Agreements Explained

8 July 2024

Contract Farming Agreements are formal joint venture agreements where a landowner or occupier (the Farmer) engages the services of a contractor to manage farming operations under pre-arranged terms. Unlike using a contractor for specific activities, CFAs cover the entire farming operation. 

Contract Farming Agreements (CFAs) are distinct from other arrangements like share farming, tenancies, partnerships, or short-term lets. They are highly flexible and applicable to both arable and livestock farming. A fundamental principle of CFAs is that the Contractor is delivering services to the Farmer and not operating on the farm on their own account. The Farmer therefore maintains risk associated with farming. However, as the contractor will be delivering the entire farming operation, agreements rely on trust between Contractor and Farmer. 

While such agreements are typically viewed as being suitable for arable farming, CFAs can also be used for livestock systems. 

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Scenarios for a Contract Farming Agreement

There are many reasons why the Farmer or the Contractor could consider entering a CFA.  Some common reasons are listed below. 

 Benefits for Farmers: 

  • Allows the farmer who wishes to retire or downsize to maintain their active farmer status. 
  • Allow the farmer to release capital from the business or avoid investing in new equipment. 
  • Avoids long term contractual constraints such as a tenancy. 
  • Avoids staffing issues such as recruitment or where key staff members have left/retired. 
  • Ability to retain subsidies as still an active farmer. 
  • Taxation advantages of being an active farmer such as income tax, VAT and inheritance tax benefits of farming. 


Benefits for Contractors: 

  • Economies of scale through farming additional land areas. 
  • Additional income through performance-based rewards (a percentage of profits). 
  • Opportunities for new entrants without the need for large capital outlay. 
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Agreement structure

A Contract Farming Agreement should be laid out in a legally binding contract and should be set up and reviewed by an agricultural consultant or agricultural lawyer.  

A full agreement will outline the following details: 

  • Duration: Typically 3-5 years. 
  • Responsibilities: Clearly defined roles for both parties, including maintenance, insurance, and accounting. 
  • Financial Terms: Includes Contractor's Basic Fee, Depreciation Payments, Return on Capital (ROC), and Net Return, with a detailed calculation of the remuneration of both Farmer and Contractor. 

Remuneration within a Contract Farming Agreement

As the Contractor is carrying out the full farming operation, remuneration within a CFA generally goes beyond a basic fee for contracting services, and includes a split of the final profits for the year (known as the divisible surplus). This provides both a reward and an incentive to the contractor for good performance. 

For the purposes of the agreement, a separate business bank account is generally set up in the name of the Farmer for all transactions in the year associated with the agreement.  In the case of an arable agreement, this would include seeds, fertiliser, sprays, basic contracting charges, any other associated costs, and the final sale of grain/straw at the end of the year. The profit left is then allocated between the farmer and the contractor in line with the terms of the agreement. 

Remuneration for both parties is generally split out as follows: 

Contractor’s Basic Fee 

Fee paid to the Contractor to carry out the work required under the agreement.  The fee is generally fixed (per hectare or per breeding animal) and is paid in set instalments throughout the year. The basic fee is generally just to cover costs, rather than making any profit.   

Farmer’s Basic Return 

The basic financial return provided to the Farmer in exchange for providing the land, buildings and infrastructure required to the agreement.  As the Farmer is the risk taker in a CFA, the Contractor’s basic fee would be paid first. 

Divisible Surplus 

The profit left over after all costs within the agreement have been accounted for (including Contractor’s Basic Fee and Farmer’s Basic Return). This is then split between the Farmer and Contractor on a percentage basis as outlined in the CFA. Usually this is weighted towards the contractor as a reward for work done and also to incentivise good performance. 

Importance of a legal agreement

A proper legal agreement for a Contract Farming Agreement (CFA) is crucial for several reasons:  

  1. Clarity and Structure: It clearly defines the roles, responsibilities, and expectations of both the Farmer and the Contractor, ensuring smooth operation and mutual understanding. 
  2. Financial Protection: It protects both parties' financial interests by detailing payment structures, profit-sharing mechanisms, and risk management strategies, reducing potential disputes. 
  3. Legal Compliance: Ensures the agreement adheres to the law of contract, avoiding unintended legal consequences like reclassification as a lease, partnership, or employment relationship, which can affect taxation, tenancy rights, and support payments. 
  4. Dispute Resolution: It includes mechanisms for addressing disputes and termination conditions, providing a clear process for resolving conflicts and protecting both parties' rights.

Overall, a proper legal agreement ensures the smooth, efficient, and fair operation of a CFA, safeguarding the interests of both the Farmer and the Contractor. 

Seek advice

A Contract Farming Agreement is a legal document that provides protection to both the Farmer and the Contractor. Therefore, always seek advice when setting up a new agreement from an experienced agricultural consultant or agricultural lawyer. 

A key benefit of a farmer entering a CFA is that it can retain trading income status for income tax, VAT and inheritance tax.  Therefore, your accountant should always be consulted as part of the process.  The agreement must be properly structured to prevent unintended impacts on capital gains tax and inheritance tax. 

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