Partnership options

There are a wide range of opportunities for collaboration within agricultural production. Collaborative agreements could range from anything between a simple machinery sharing arrangement, through to a full joint farming venture. The main partnership options are as follows:

1. Informal Machinery and Labour Sharing:

In its simplest form labour and machinery can be shared between neighbouring businesses on an entirely informal basis. For example Farmer A borrowing a mower at certain times of the year in exchange for Farmer B using a muck spreader at a different time in the season. This would not require a formal or complicated agreement. It is based on mutual trust and benefit.

2. The Joint Ownership of Machinery:

At a slightly different level, machinery sharing can involve the joint ownership of certain items of machinery by two or more businesses. Simple agreements are available which enable businesses to share ownership according to a percentage. For example two neighbours purchase a forager together. Farmer A pays for 60% of the capital cost, Farmer B pays for 40%.

The farmers than receive an invoice from the machinery business equivalent to a charge per acre (including all the costs, depreciation, repairs, insurance, fuel and labour). Effectively the machinery business breaks even, but is underwritten by the farmer owners.

An example of this would be the TVP Share to Milk case study.

The immediate benefit is clearly, that both businesses share the cost of reinvestment, thereby lowering the capital required by each party. Furthermore, it may mean that by sharing the cost they are able to invest in a slightly higher specification machine to their mutual benefit.

With regard to the practicalities as to how that machine is used, they are free to agree how much time that forage harvester spends on each farm. Very often in these situations repairs and running costs are also split in direct proportion with ownership and as a consequence the businesses are able to benefit from reduced operating costs as well.

This kind of machinery sharing opportunity could work for a dairy farmer and could involve basic equipment such as soil aerator right through to silaging kit, feeding equipment or a slurry application system.


3) Combined Farming:

It may be the choice of potential Joint Venture partners that they form a new central business entity to act as, effectively, a contracting business providing services to each parent business. In this instance the choices available to the parties would be a Partnership, a Limited Liability Partnership or a Limited Company. If we look at an example where two neighbours decide to form a new Limited Company arrangement might be along the following lines:

  • Ownership of the shares in the Company are split in direct proportion to the acreage provided by each business
  • The machinery required to provide contract services is owned in a similar proportion
  • Variable inputs and direct running costs are purchased by the Limited Company and re-invoiced to the parent businesse
  • Similarly outputs and crops sales may also be sold in proportion to acreage and shareholding

This is where either an existing herd-size is grown by adding extra cows which are owned by someone else e.g. the herdsman or neighbour.

Alternatively an existing herd-size could be part sold to a herdsman or neighbour to release capital and maybe long-term provide a 100% exit strategy (e.g. Retirement).

The rewards would therefore be on a proportional basis according to the ownership of the cows. There would however be a prior charge for land, quota and facilities provided, along with a labour charge.


4) Contract Farming:

Contract Farming offers a solution for farmers who wish to step back from the day to day demands of farm management. Importantly, it remains a Joint Venture between the parties and once again both businesses retain their individual independence and integrity.

With a cow hire agreement, the owner provides land, quota, facilities and a working capital bank account. The contractor provides 'know how', cows, machinery and labour.

Where Contract Farming is selected as the right option for part or the whole of a farm then certain core principles are crucial to success with regard to the contract that is put in place for that block of land:

  • The Farmer remains the proprietor of the farming business
  • The Contractor is engaged to provide 'farming services' to the farming business
  • All business transactions relating to the contract and the block of land in question must be administered in the name of the Farmer
  • Contract Farming Agreements must be carefully monitored and managed

There are two principle types of Contract Farming Agreement:

The Fixed Price Contract:

In a livestock situation, the terms of a Fixed Price Contract will include the engagement of the Contractor to provide services according to specific Terms of Reference. For example, the Contractor will provide all livestock management from feeding and bedding up, to housing of stock.

In return for the provision of these services, the Contractor will be paid a fixed price, agreed in advance at the beginning of the season.

In this situation the farmer retains 100% of any margin created but also bears 100% of the risk of adverse trading or weather conditions.

These Agreements can be very simple to establish, but from the Farmer's perspective the Contractor has less financial incentive to perform well, as he is receiving a fixed fee payable irrespective of the financial outcome of the farming year.

Structured Contract Farming Agreement:

In a Structured Agreement the Contractor is still engaged by the Farmer to provide Contract farming services and they may, indeed, be precisely the same services as are provided under a Stubble to Stubble agreement.

The key difference is that the Contractor is involved in the sharing of a divisible return with the Farmer and indeed would draw the majority of his annual fee from his share of the divisible return. Consequently this mechanism ensures that incentive is built in for the Contractor to optimise trading performance and look after the farm and it's resources as though they were his own.

Provided both parties observe the core Contract Farming principles, agreements are then extremely flexible. For example, now that subsidies have been decoupled the Farmer will have the choice as to whether to include or exclude the Single Payment from the trading account.

Contracts can work just as effectively on livestock farms or arable farms. Specific ingredients may differ but the principles remain exactly the same.


Summary/Conclusions

All of the possible Joint Venture should be focused and established to achieve some or all of the following objectives:

  • Retention of key personnel in the business
  • A basis for improved returns to all parties
  • Maximisation of economics of scale and minimise costs of production irrespective of what system used for producing milk

For further information on taking the next steps to collaborate in the dairy sector contact us.

Source: Andersons Farm Consultants, 2007