Contract Farming Challenges
Returns from Contract Farming Agreements (CFA’s) have reduced significantly in 2015 with no significant improvement expected for 2016. Contributing factors are commodity prices, support payments and crop husbandry/rotations.
Wilson Wraight manages approximately 80 CFA’s across 43,000 acres. The average result from harvest 2015 has fallen by approximately £100 per acre compared to 2014 – see below.
Combined Total Returns to Contractor and Farmer – £/acre
|2014 harvest||2015 Harvest|
|Interquartile Range||285.5 – 388.7||216.2 – 290.0|
The impact on both parties is very clear – lower returns – and for the majority of our CFA’s this reduction is being borne equally between the parties. This is damaging the Farmer’s income and potentially is below the cost of production for the Contractor.
The 2015 survey of CFA results did indicate that a small number did not produce sufficient income to cover the Farmers Basic. With expectations for 2016 returns to perhaps be lower the likelihood of deficits occurring in 2016 are greater. How a deficit is treated within the CFA should be covered by the legal agreement. Points to consider are:
- Who incurs the deficit? Some CFA’s stipulate this is the Farmer as the sharing of losses could constitute a partnership, rather than a contract, is in place. Others allow for the deficit to be carried forward into the following year but with no prospect of better returns in 2016, and 2017 too far away to judge, this could compound the problem.
- Equitable division of returns and risk. In the event of a deficit, the Contractor is only going to earn his Basic Fee which typically is not designed to cover costs. Could this have an adverse effect on the Contractor’s attention to detail? This goes against the ethos of the CFA structure which should incentivise the Contractor to produce as much income as possible. Although a review of the contract terms may not be due, it could be prudent to implement one early to reflect the current economics.
- Working capital. If deficits are deemed the Farmer’s, these have to be repaid to the Contract Agreement bank account, otherwise the CFA working capital requirement increases. With First Charges typically due at the end of this month for 2016, this is particularly relevant. Also, if the expectation is for a deficit from the 2016 harvest, is it correct to withdraw the Farmers 2016 Basic Return in full, as this will add further pressure to CFA cashflows?
Most CFA’s become long-standing arrangements and there is generally a willingness from both sides to see the Contract continue. There is no doubt the current economics are challenging but a well-structured agreement and medium-term planning can overcome some of the current difficulties.