Go contract farming to grow farms
I have just returned from a trip to the UK as part of my Nuffield Farming Scholarship study. Having visited countless farms during the course of my travels, I was struck by the popularity of the contract farming structure as a way of facilitating expansion in dairy farming.
The way it works is as follows. A farmer hires a third party as a contractor. The contractor carries out all the work of animal and crop husbandry as an agent for the farmer. The farmer must make all key decisions about cropping or feeding and strategy, but the contractor can give advice and be involved in the decision-making process.
To keep the Revenue satisfied that this is actually a contractual rather than a pseudo rental or leasing arrangement, the farmer must be able to prove his or her involvement in the day-to-day management of the operation by means of minutes of meetings and diaries.
The land, dairy facilities and milk quota are provided by the farmer who remains in occupation of the farm. The management, labour, machinery and expertise are provided by the contractor. The dairy herd and youngstock can be owned by the farmer, but more often than not they are owned by the contractor, who leases the stock to the farmer. In return, the contractor receives labour costs, power costs, a management fee and return on any tenant capital, such as a rental fee for cows.
The farmer receives a 'first charge', which has been described as a rental equivalent and return on any capital. Whatever money is left after paying all of the above is called the 'divisible surplus.' This is split between the farmer and contractor, with the contractor getting the greater share to reward success and high performance.
Contract Farming vs other Business Structures
Contract farming should not be confused with partnership. The main difference between the two structures is that partnership requires partners to 'pool' all their assets together, whereas with contract farming, the farmer provides the main assets while the contractor works those assets. Also under the contract farming model, the farmer bears the risk, while under the partnership model the partners are jointly and severally liable for all the debts of the partnership.
It is important that the contract farming arrangement is worked as such and cannot be a guise for something else, for example a partnership or a lease. While it is important to seek professional advice before entering any collaborative farming venture, the following points can be used: