Type of partnership

Collaborative agreements could range from anything between a simple machinery sharing arrangement, through to more complex arrangements which could include block cropping, shared gross margins and division of product output. The agreement and legal partnership should be appropriate for the activities of the group and must be fair to all parties.

In order to fully assess the types of arrangements the basic requirements of any joint venture must be understood and then the multitude of possible structures can be assessed to suit individual situations.

Historically joint ventures have been constructed to avoid the formation of a partnership or a tenancy and to ensure that the farmer is considered by Her Majesty's Revenue and Customs to be running a farming business. This has been tested by the Revenue in recent cases and comments made that they need to see the landowning farmer to be fully involved in the day to day management and decision making of the business.

The main relief at stake is the Inheritance tax relief on the farmhouse which is usually the largest asset owned by a farming family. If this is lost as a result of a badly constructed agreement or deviating from the written agreement, 40% of the value of the house can be at stake.

Unfortunately the Single Payment Scheme has added complexities to the development of joint ventures because of the basic requirement to be in occupation of the land for the 10 month period. Other current issues include the requirement for home saved seed to be only used on the farm of origin and the possibility of the RPA treating collaborating businesses as one entity with the risk of capping of SFP support.

The basics of a well structured joint venture should consist of in-built returns to the parties to enable them to be automatically rewarded for their capital, effort and expertise at differing profitability levels.

All potential joint ventures should learn the following basic business principles before contemplating an arrangement. Too many people have attempted to build empires in the past with many having to downsize over the past few years:

The laws of marginal costing or marginal economics. In other words what is the return from the last few acres, not the average of the total acres.
The law of diminishing returns which is a relative reduction in returns for an ever increasing amount of input.
Partial budgeting to financially assess a change in the business by quantifying the costs saved and additional income compared with additional costs and less income.

Types of Joint Ventures

Although there are a multitude of possible structures broadly they fall into the following three categories:

1. Share farming

2. Contract Management or Contract Farming Agreements

3. Machinery Sharing Syndicates

1. Share Farming

The landowner and the farming contractor agree to split the variable costs and sale proceeds in a particular ratio based on the relative values of their contributions. For example the landowner will contribute the following:

The landowner will contribute the following:
Land and buildings based on the rental value, say	24,000
House	4,000
Grain stores	2,000
Insurance and standing crops	1,000
Management	5,000
Interest on 20% ownership on machinery (loan)	800
Total	36,800
%	48%
The contractor will contribute the following:
Labour and machinery based on contracting fees	36,000
Management	3,000
Telephone and office	800
Total	39,800
%	52%

Therefore the inputs, drying costs, insurance of grain and crop sales are split on the % ratio and the SFP can be nominally split on the same ratio:

Either party can claim the SFP as they will both be in occupation of the land.
Each party run their own separate businesses with their own VAT registrations, accounting and tax assessment.
Share farming has not been popular in the arable sector in the UK and the challenge for young professional farmers is to develop a methodology whereby a young entrant can build up equity in a farming business which is not possible in a contract farming agreement. For example in the table the farmer has retained a 20% value in the machinery which the contractor will gradually purchase.

2. Contract Management or Contract Farming Agreements

A contract farming arrangement is essentially a farmer using the services of a contractor or another farmer to supply labour, machinery and management. The contractor will receive a set fee for the services provided and a bonus as a percentage of the calculated surplus from the venture. The arable results are calculated in a memorandum joint venture account which is not an entity such as a company or partnership but an arithmetical calculation to establish the bonus for the contractor.

Example of Memorandum Account	Cost per Ha
Crop gross margin	247
Single Farm payment	197
Fixed costs agreed to be included:
Insurance of crops paid by farmer as owner of the crops	10
Electricity for drying grain	14
Number 2 account interest	12
Contractors basic fee	197
Farmers retention	173
Harvest surplus	38
Split contractor 80%	30
Split Farmer 20%	8
Second split of 50% each above total return to contractor of say £300	Nil
Total contractor	227
Total farmer	181

Most arrangements in the past have been centred around the Arable Area Payment (now SFP) being the net return to the farmer and both parties need to fully consider the effect of the inevitable reduction in SFP over the forthcoming years. In the above example when the SFP reduces below £173 per Ha the arable gross margin is contributing to the farmers' retention.

Several variations have developed over the past few years however care must be taken to ensure that the farmer is seen to be fully involved in the management of the arable business for taxation purposes:

The Single Farm Payment (SFP) can be left out of the equation with the farmer not taking a farmer's retention. As the SFP reduces over time the return to the farmer will reduce.
The contractor can be given the option of purchasing the grain at harvest.
The contractor can fund the inputs on an unsecured loan however this is normally tied in with an option to purchase the grain thus providing security.
Entry and Higher level Scheme payments are usually kept outside the arrangement.
Contractor paid quarterly in arrears or sometimes annually in arrears.

3. Machinery Sharing Syndicates

A number of neighbouring farmers jointly and equally run a partnership or company that provides contracting services to their farming businesses. The services could range from one machine such as a sugar beet harvester or combine harvester to all the operations required by the businesses. There are several basic efficiency principles:

A syndicate allows the businesses to completely start again with their machinery systems often employing the latest minimal tillage techniques. Selling unwanted machinery at a public auction releases capital.
Bigger, more efficient machinery can be justified on the larger area (often several thousand hectares). For instance one combine may replace several older machines previously operated by each member.
The capital of the syndicate is funded in proportion to the acreage farmed by each member.
Ideally labour should be charged in from the members at an hourly rate which allows direct labour to be calculated accurately and a further assessment of labour requirements made in the second season.
Farmers themselves can continue to carry out as much physical work as they wish as long as it is planned.
Margin from the crops can be shared by the members and equalised between them through a share farming arrangement allowing the total acreage to be farmed under one rotation.
Specialist machinery such as sugar beet harvesters can be funded at a different percentage within the syndicate based on relevant acreage. Equally contracting income from the sugar beet harvesting can be distributed to the members in the same proportion.

Often one or two of the younger members of the families or a new, non-related entrant, can operate as working managers, being paid an acreage management fee in addition to their hourly rate for machinery operations. They can be mentored and overseen in the early stagers of the agreement by nominated, senior members of the syndicate.

An important principle of a successful syndicate is chemistry between the people. All parties should thoroughly discuss potential implications and the assistance of an experienced professional at this stage is essential. The following is a brief run through of the steps that are required together with the targets:

Draw up a list of machinery required to efficiently grow crops on the total acreage - the target is a maximum value of £445 per ha. The average on the individual farms is likely to be in the region of £544 per ha therefore reducing the capital by £99 per ha, releasing the capital employed back to the individual businesses.
Calculate the tax implications for the individual businesses as a result of the transfer or sale of machinery and seek the assistance from a specialist accountant, there are several methods available to minimise the tax.
Decide on the entity needed to run the joint venture. The options are a partnership, limited liability partnership or a company the choice will depend upon the tax implications involved.
Ideally retain the labour employed in the individual businesses unless there is a large imbalance in labour employed and one business is responsible for a large proportion of the down time. This will enable the actual hours charged to the syndicate to be recorded and analysed after one season. The usual charge is £12.50 per hour.
The business will require VAT registration and a bank account and the books should be kept by one of the members charging around £10 per hour.
Agree who will be responsible for the day to day management and a payment of around £5 per acre made for management.
A Heads of Terms should be drawn up by a suitably experienced person detailing all points discussed and agreed. This document can be varied by agreement at the AGM every year.

Substantial financial savings can be made in an efficiently managed syndicate but it isn't just about cash benefits. Other gains reported from existing syndicates include:

Problems can be shared.
Members with interests outside the farming business can step back from the business by agreement. This works particularly well as other members will be able to carry out the work and charge their hours.
Farming can be a depressing and lonely business and a syndicate alleviates both of these. Many individuals have stated that farming is fun again now.
Often the younger generation actually runs the joint venture thereby providing them with opportunities.
The syndicate enables the crop rotations to be run as one on the total acreage thereby block cropping and the gross margin equalised.
This rationalisation and level of efficiency can be limited by the grain handling, drying and storage facilities available. This can possibly be overcome by the renting out of existing grain stores for commercial use and tonnages purchased in a collaborative farmer controlled grain store.

Machinery syndicate benchmarked costs	Average arable farm	Syndicate average
Labour recharges	24	39
Machinery depreciation	20	42
Spares and repairs	14	18
Contract and hire	6	19
Fuel	11	18
Other costs	5	8
Total Labour and machinery	80	144
Additional administration costs	8	-
Total		88

Source: Gary J Markham, Agricultural Partner, Grant Thornton, 2007

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

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