In-Hand Farming vs FBT vs Contract Farming
High level business strategic planning is essential in the current economic climate.
Falling commodity prices and a constantly changing policy and regulatory framework are impacting on profits and cash flows. In addition the objectives and goals of the business partners, including family, can change. Therefore long term planning for the future should not shy away from considering a major change, particularly as there is a continuing disjoint between earning capacity on land and cost of access to land either through rent or purchase. Indeed it may offer some significant opportunities for capital, management time and the release of buildings.
Using our Farmers Weekly/Savills Virtual Farm, a hypothetical 830-ha arable farm managed in hand within a family partnership, as an example we look at three possible business options with the financial results illustrated in graph 1.
1. Business as usual
In hand farming 830 ha (630 hectares owned and 200 hectares rented on FBT).
2. Enter a ‘Contract Farming Agreement’ (CFA)
a. Farm subsidies (including environmental payments) are included in the CFA and the net figures shown in graph 1 include income from cottages and costs of around £60 per ha (across the owned property) for property maintenance and general farm costs.
b. Release around £500,000 of capital from the sale of farm machinery
c. Farm labour will need to be made redundant or redeployed which is a significant consideration and will involve some cost.
3. Let 500 hectares of owned land on a Farm Business Tenancy (FBT)
a. Farm income calculated for a FBT of £407 per hectares - at a level which will allow an incoming tenant to farm with a long term management objective in order to maintain soil health and keep the land in good heart.
b. Budget includes income from cottages and costs of around £60 per hectares (across the owned property) for property maintenance and general farm costs.
c. Release around £500,000 of capital from the sale of farm machinery
d. No annual cash flow requirement for working capital of over £350,000.
e. Farm labour will need to be made redundant or redeployed which is a significant consideration and will involve some cost.
Graph 1: Business Options – Financial Estimates
Savills Research (based on 2015 Harvest Budget)
The loss of trading status in the letting of a farm on an FBT needs to be carefully considered in the overall tax planning. In addition, the implications of the ‘personal’ angles, which include succession and changes for farm employees, need to be fully appraised.
However, alternatives to continuing to farm in hand potentially open the opportunity to invest capital in other areas, whether on or off farm, and to free time for on farm diversification, off farm income or to enable retirement.