Structuring the right contract farming agreement (CFA) makes a real difference to the profitability of a business. But, all too often, the focus is on the detail in the agreement and loses sight of the principle behind farming with contractors.

After all, that is the key. In a CFA, the farmer sets up a dedicated bank account, pays the bills, and takes all the vital management decisions. In return, the contractor provides the labour and machinery for a set payment. Any surplus to the net margin at the end of the harvest year is shared between the two parties.

The reality, however, can be a lot messier. In some cases, the contractor pays for seed, fertiliser and sprays rather than the farmer. There’s sometimes uncertainty over who makes the claim for the Basic Payment Scheme. Both situations raise questions about who is taking the risk and whether they share any loss. What’s more, some farmers are attracted by small savings when they should focus on the bigger goal that is being an active trading business, with all the benefits that go with this.

Farmer earnings are on the up

So, where have we got to with contract farming agreements? Well, the initial results from our benchmarking survey last year show a continued widening of returns in favour of the farmer. The initial results from last year show that average earnings were up from £175 to £180 per acre. Contractors have seen a 3% drop in total return, which has increased the gap to £27 per acre.

Three golden rules for mutual success

For me, though, there are three golden rules to achieving a great result for the farmer and contractor. They have nothing to do with the detail of a contract, but focus on the principle.

1 - Get the right contractor; a point summed up brilliantly by one client who said: ‘I employed a farmer, not a contractor.’ This is someone who is not simply spreading their costs over more acres, but is interested in improving productivity, soil quality and returns – for themselves as the contractor and for the farmer. That’s the key.

2 - Be realistic when setting the level of first charge. Renewals have taken place where the farmer’s first charge is now higher than the contractor’s basic charge. The level of the farmer’s first charge has to be sustainable and not all businesses can carry a robust first charge. A lot comes down to the quality of soil, field size, yield potential and grain storage.

If all of these are favourable, the potential for a higher gross margin – meeting the first charge with a good divisible surplus – is realistic. But both the process and the relationship can become negative if the first charge is not met.

3 – Communicate! There should be continual engagement about work activities, crop prospects and infrastructure, whether that’s discussions about tracks, hedges, drainage, the shoot or the grain market. Communication should not be limited to the quarterly meeting – it’s the grease that ensures the cogs turn.

Putting into practice

Looking at CFAs with these ideals in mind can make a big difference. In 2010, we were introduced to a farm business of some 450 acres on fertile land in Essex. On paper, the contractor had a strong farming reputation, but the CFA was struggling and communication was poor. The farm did not fit his overall business, was too far away from his own farm and, in the end, he was trying to help out a friend.

Following a sensible meeting, the farm was retendered and the right contractor appointed. In 2009, the farm had made a loss of more than £50,000 with wheat yields below 2.5 tonnes per acre. By 2011, with yields nearing four tonnes per acre, the farm turned a profit of more than £100,000. A great result for all.