What is Contract Farming?

From industry knowledge to latest machinery – farms present all kinds of needs to assist their daily operations. When tasks require additional help, farmers may resort to contract farming.

Through agriculture contract farming, farmers gain better support towards reaching their productivity goals. However, the right steps must be taken beforehand. If not, you could end up with unlawful contracts, compensation fines, and business losses.

In this guide, we’ll look at what contract farming is, who’s involved in them, and what your agreements require when conducting business with third parties.

What is contract farming?

Contract farming is a joint venture between two parties: the farmer (who is the owner) and the contractor (who is the service provider).

Farm contracting doesn’t involve equality between the two parties. Farmers seek out specific contractors for use of their products or services. For example, asking for expert knowledge on slurry farming. Or seeking professional help on tackling farmers mental health.

Who is involved in farming contracts?

There are usually two main parties involved in a farming contract, and each have their own obligations through agricultural law.

• Farmers: They provide land, buildings, fixed equipment, and new bank accounts (used to contract farming rates, like outgoings or income).
• Contractors: They provide labour, machinery, additional storage, and management expertise.

What terms are included in a contract farming agreement?

Before you decide to work with a contractor, farmers should outline the terms of contract farming agreements first. The agreement may include the following areas:

Responsibility

Farmers stand as the ‘responsible person’ during any kind of contractual work. This means they have ultimate control should the project cause financial or safety risks. This also means you must take proper steps towards relevant legal duties and compliance.

Roles and duties

The role of each party should be clearly outlined within the contract. This includes their titles, work duties, and any other task-related information. A successful partnership is one that respects each other’s responsibilities, as well as productivity expectations.

Remuneration

Remuneration (or payment) should always be covered within the agreements. Farm contracting prices are usually agreed to by both parties before anything is officially signed. The agreement may also include details on separate bank accounts for either party (i.e., to buy supplies or receive income).

Line of work

Contract farming arrangements are mostly suitable for enterprise-level farms. These businesses usually run multiple outlets; i.e., like producing by-products like dairy or textiles, or selling animal meat and crops. The agreement should include which line of work the contractor is connected to, and whether it may overlap into multiple sectors.

What are the advantages of contract farming?

Contract farming evokes numerous benefits for both farmers and contractors. For example:

• Easy access to expertise, services, and credit.
• Get to use machinery and technology (instead of buying them).
• Better management and production skills.
• Higher market security (as well as access to newer markets).
• Less price-related risks.
• Greater income-stability.

Contractors are also benefits from:

• Stable supply of materials, machinery, or services.
• Products conform to standards on safety or quality.
• Less feedback and labour costs in comparison to working on company-owned lands).
• Better chance to secure high-quality products.
• Being able to overcome land constraints.
• More reliability on production levels compared to open-market purchase.

What are the disadvantages of contract farming?

Whilst the benefits are many, there are certain downsides that come with contract farming. Farmers could face the following disadvantages:

• Less flexibility to sell to alternative contractors (especially when prices increase).
• Possible delays in payment or feedback.
• Become indebted to loans provided by the contractor.
• Possible environmental risks when growing only one type of crop.
• Unequal bargaining power between farmers and contractors.
• Heavy dependency or vulnerability if contractors are unreliable.

Contractors can also suffer from disadvantages like:

• Higher transaction costs when working with smaller contractors.
• Risk of side-selling if farmers decide to break contractual terms or sell to others.
• Potential misuse of information if farmers use seeds or fertilisers.
• Less flexibility to find alternative supplies.
• Possible risk to reputation if issues occur.

How to start a contract farming agreement

Contracting is an excellent way to multiple and diversify your farming business. With the right people, you’ll have access to the best labour, equipment, and all-round expertise. Let’s take a look at how to start a contract farming agreement with a contractor:

Select a contractor

Farmers should start by selecting a contractor for the specific work they need completing. They could be chosen based on a single or multiple services they provide.

It’s important to evaluate your farming goals when choosing contractors. Look into performance rates and even testimonies to establish whether they’re the right people to initiate a partnership with.

Seek legal advice

As contract farming agreements are a legally binding document, it’s vital for farmers to seek legal advice beforehand. These should only be drafted by professional experts, like an agricultural consultant or lawyer.

These professionals will look into all kinds of legislative areas whilst drafting the agreement. For example, the main ones include:

• Roles and responsibilities: This outlines what the structure is within the partnership, as well as what expectations are held for both parties.
• Financial protection: This covers all details relating to payment, profit shares, and risk management that could include compensation and fines.
• Legal compliance: This ensures the agreement stands in employment law. This also looks at managing support payments, tax contributions, and tenancy rights.
• Dispute resolutions: This looks at addressing disputes that may occur between parties, like resolving conflicts, protecting rights, and terminating agreements.

Define the terms

When drafting a farming contract agreement, the bulk of the document is made up of the terms and conditions. Farmers should ensure agreements cover all terms on ownerships, assets, and profit sharing.

It’s also important to clarify what each party’s role is, what their objectives are, and what is expected from them. It can also include the main aspects of the project, as well as timeframes and deadlines.

Consider variable costs

Contractors will carry out work to receive a basic fee. This amount is generally fixed (i.e., per hectare or breeding animal). Basic fees usually cover costs rather than relate to making profit.

Farmers receive a basic return in exchange for providing land, buildings, and infrastructure needed for the agreement. As the contractor is the risk-taker, they’re basic fee is usually paid first.

The leftover profit after all costs is accounted for. This is then shared between either party on a percentage basis agreed to beforehand. Usually, the contractor earns more as rewards for their work and performance.

Get expert advice on contract farming with Peninsula 

Farming projects cover all kinds of requirements and demands – each distinct to their own lands. That’s why it’s common to seek expertise and support when it’s necessary.

Peninsula offers expert advice on contract farming. We offer 24-hour H&S advice – ensuring any agreements with third parties are law-abiding and water-tight.

Want to find out more? Contact us on 0800 028 2420 and book a free consultation with one of our Health and Safety consultants today.