Partnership options for red meat producers

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 more complex joint farming ventures. The main 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 immediate benefit is clear, in 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.

3. Combined Farming:

Potential Joint Venture partners may decide to form a new central business to act as, effectively, a contracting business providing services to each parent business. In this instance the choices available to the parties would be an ordinary Partnership, a Limited Liability Partnership or a Limited Company.

An Ordinary Partnership:

A Partnership is extremely flexible and in many ways is the easiest arrangement. Many people are uncomfortable with the liability aspect and therefore prefer a Limited Liability Partnership or a Company.

Limited Liability Partnership:

A Limited Liability Partnership is a corporate entity structured like a Company. Instead of a Board of Directors there are Designated Members of the Partnership who will be responsible for management. It is usually taxed like an ordinary Partnership and is generally more flexible than a Company.

A Limited Company:

Some people prefer to have the formality of a Company , although companies are usually subject to higher regulation. Tax will be paid as Corporation Tax, rather than Income Tax. Initial capital required to run the Joint Venture (which will be largely represented by the value of the machinery) will be structured as loans, rather than business capital.

We strongly recommend that specialist accountancy and other prefessional advice is sought before establishing a new business, be that a Partnership, LLP or Ltd Company, to ensure the most appropriate vehicle is used.

If we look at an example where two neighbours decide to form a new Limited Company, the arrangement might be along the following lines:

Ownership of the shares in the Company are likely to be split in direct proportion to the enterprise scale provided by each parent 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 businesses.
  • Similarly outputs and crops sales may also be sold in proportion to acreage and shareholding.

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.

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 or enterprise:

  • 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 enterprises 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 including tasks such as feeding and bedding up.

In return for the provision of these services, the Contractor will be paid a fixed price, often on a weekly basis, 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 enterprise.

The 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 Fixed Price Contract 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 Contract 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.

Source: Andersons the Farm Business Consultants, 2007