Three tiers for Contract Farming Agreements

    30 August 2013

    A new look at dividing the profits in Contract Farming Agreements which gives farmers a greater reward for their risk, is proving popular in the eastern counties says Giles Hanglin, Director of Savills agribusiness consultancy.

    The change in direction from a two to a three tier arrangement is particularly pertinent as 2012’s high commodity prices and the region’s relatively good yields have led to some impressive divisible profit shares.

    Hanglin explains: “Traditionally, this divisible surplus would be split more or less equally between the farmer and the contractor.  Some agreements have a two tier split, with the contractor getting a larger share of the first part to ensure all costs are covered, and the remainder divided more evenly. 

    “The divisible profit share is there to motivate contractors to grow the best quality crop with the highest yield that they can.  But, when commodity prices reach the levels of 2012, a proportion of the income achieved is beyond the contractor’s influence.  While it is perfectly reasonable that both parties benefit from this, it is our view that as the farmer holds the greatest exposure to very poor prices or crop failure, he or she should also receive the greatest reward from very high prices.”

    Contractors are becoming more aware of this and it has been reflected in a number of tenders that Savills has seen for new agreements over the last couple of years.  It has led to three tier arrangements, whereby the first tier is split to ensure that the contractor’s costs are fully covered, depending on soil type and cropping, and the second tier ensures a good return to both parties in a reasonable year.  The third tier is triggered when commodity prices and yields combine to produce above average returns and is weighted in favour of the farmer.  The contractor still receives a bonus, but the majority of the super profit goes to the farmer as a reward for the risk that is not present in a Farm Business Tenancy.

    Hanglin  concludes: “Contractors are coming to realise that tenders on this basis are giving them the edge in a competitive process, improving the return to the farmer in an imaginative way.  We and our clients, both farmers and contractors, certainly saw the benefits of these agreements in 2012.  Contractors are still motivated to achieve the best results and earn a good return, while the farmers know that they will benefit from any future spikes in commodity prices.”

    For further information please contact:
    Giles Hanglin Director Savills Agribusiness Consultancy 01223 347 276
    Louise Rose Savills press office 07967 555817


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