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HMRC internal manual

Business Income Manual

Farming: sales via marketing co-operatives

Marketing co-operatives, particularly for the sale of cereals, are a common feature of the farming scene in many parts of the country. Where grain or other produce is sold through such a scheme, it may be worth checking to ensure that the whole of the crop has been accounted for either in stock or in sales. General guidance on farm marketing co-operatives is provided here but in individual cases there is no substitute for seeing the agreement with the co-operative and all the paperwork which the farmer has received. The key matters to be considered are whether the farmer is selling produce to the co-operative or through the co-operative and the timing of such transactions.

A summary of a typical scheme is as follows:

1) A co-operative company is formed, of which farmers are shareholding members, and through the agency of which the farmers agree to sell their grain.

2) The company aims to sell the grain to the best advantage of the farmer through a price-pooling scheme which operates from harvest onwards.

3) The company is authorised to receive on behalf of and as agent for the farmer all payments from buyers, and arranges for the transport of the cereals from the farmer’s premises to the buyer’s premises.

4) The farmer commits his or her grain to the co-operative after harvest each year, having previously supplied them with yield forecasts. All grain of like quality is then put together to form one large parcel for selling purposes and is sold over the period from harvest to 30 June in the following year.

5) Storage of the grain is usually the farmer’s responsibility and the farmer is responsible for insuring the grain while it is on his or her premises. Individual farmers normally arrange to have their grain collected at specified times, which may vary from year to year. Some co-operatives however have extensive storage facilities of their own.

6) Payments to the farmer are made usually in four or five instalments over the period from harvest to the following July on a per tonne basis. The final payment in July is then adjusted to bring the total to the exact average price for the particular pool. If the farmer is unable to deliver the goods he is required to repay the advances.

7) Where a farmer is left with excess stock in July this is sold in `short pools’ over the period July-September, or otherwise direct for an individual farmer, and in these circumstances payment is made within 28 days.

There are two points to consider:

  • the treatment of the stock in the farmer’s accounts at the balance sheet date,
  • the date on which the sale proceeds are to be credited.

Inclusion of stock in the accounts depends on the farmer having exposure to the risks and rewards of the stock at the balance sheet date. This in part turns on the contractual relationship between the farmer and the co-operative and the ultimate buyer of the grain.

In the sort of scheme described above, the relationship between farmer and co-operative is likely to be that of principal and agent so that the actual sale of grain is in fact direct from farmer to buyer - not from farmer to co-operative and then to buyer. It follows then that legal title remains with the farmer until the sale to the buyer is effected.

To determine when that takes place in any particular case it is worth examining the terms of the contract with the buyer but normally:

  • where cereals are collected from a farmer by a buyer or for transport to a particular buyer, - then unless the contract showed a different intention - the property in them would pass to the buyer, at the latest when they were loaded and possibly earlier say, when they were bagged, labelled and set aside for him.
  • Where the goods are in the possession of an agent for example, the farmer’s cereals in store with the co-operative, the property would normally pass when the agent having selected them from bulk store acknowledged them as the buyers for example, by labelling and setting them aside.

Problems sometimes arise where cereals delivered to a co-operative for storage, have been mixed or otherwise ceased to be identifiable. The cereals are to be treated as owned in common by the farmers in proportion to their respective shares. In those circumstances when the co-operative ultimately sells the cereals each co-owner has sold a share of the grain sold. For example, if the pool contains 5,000 tons of grain and A has contributed 500 then a sale from the pool of 1,000 tons is a sale of 100 tons by A.

Where the grain remains in the farmer’s own store or in the co-operative’s store at the accounting date then, generally speaking, title will remain with him or her and it should be included in his or her stock.

A sale is effected, and an obligation to bring the sales proceeds into account arises, at that point in time at which title to the grain passes from the farmer to the buyer. Payments made in respect of that grain prior to that point in time are no more than payments in advance to be treated as such. Where possible a finally adjusted sales figure should be entered in the accounts rather than the possibly conservative estimates which might be arrived at by reference to prices used in computing payments on account. Where accounts are made up to 31 March or 30 April it is likely that the final sales figure will be available at the date the accounts are drawn up.