We aren t alone. All around the world, farmers are searching for ways to succeed in a business environment that s more intense than anything we ve ever seen. Yes, margins have been tight before, but now markets are just more volatile, input costs are soaring and the price of land is rising beyond belief.
Wherever they farm, producers have always wanted to make decisions that allow their farms to grow and flourish while ensuring success for the next generation. Now, if we re going to achieve those objectives, we increasingly need to think outside the norm, considering business arrangements that in the past would have raised more than a few eyebrows.
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Across the Atlantic in England, few farmers smirk anymore at talk of joint ventures. For more than a decade, English farmers have been at the cutting edge of examining and then adopting alternative business arrangements to deal with their particular realities. Indeed, the Brits have evolved a whole vocabulary of new business terms. Their Department of Agriculture s website even offers a dictionary of all the phrases involved in contract farming, share farming, joint ventures and machinery rings.
To an extent, conditions in England have fostered the formation of a host of business arrangements amongst farmers who don t care what those arrangements are called, only that they work. But as always in farming, it isn t just the context that matters, it s the skills of the individual farmers.
So while Canada has begun integrating versions of these business strategies, in England there s a whole organization called the Joint Venture Farming Group with a mandate to network, benchmark and lobby on behalf of their joint venture interests.
The group is chaired by Charles Matts who is also managing director of Brixworth Farming Company (BFC), a five-business joint venture near Northampton, in the heart of English agriculture. BFC jointly farms 6,000 acres, huge by English standards, and it crops wheat, oilseed rape and field beans in rotation.
There are many paths for setting up a joint venture. Some require more and some less risk on the part of the venturers. In Canada, for example, most joint ventures do not hold assets. Instead, the assets remain with the individual businesses. But in 2000, the three original venturers of BFC took a huge leap, deciding right from the start that their venture would co-own machinery, hire labour and manage all cropping.
We jumped right into the deep end, Matts says.
The jump appears to have paid off. It s difficult to compare then to now, Matts says, and you quickly understand what he means. When their joint venture was launched 11 years ago, the economies of scale completely changed their cost structure. The group was able to cut its collective horsepower in half, and go from nine employees to just two without reducing farm output.
Since then the joint venture has continued to grow, bringing another farm and an estate into the fold.
In England, we are restricted by narrow roads, traffic, and small fields, Matts says. With that kind of fragmented farming, the economies of the joint venture became that much more obvious.
We weren t the first, but it was pretty rare when we started, Matts says. It created a bit of a buzz factor.
There was good reason for curiosity, says Andrew Wraith, director of agribusiness for Savills of London. It was a time of falling commodity prices and thin margins, and farmers in England were looking at new management structures as far back as the 1980s. Farms needed to reinvest, and coming together was one way to lower unit costs.
The scale of farming is not as great in the U.K. as in Canada, Wraith says. It is considerably more intensive and joint ventures have become commonplace because of that intensity. What you tend to find are larger farms wanting to expand, but the price of land is prohibitive.
Increasingly, that complaint wanting to expand but the price of land being prohibitive looks like it may become a Canadian reality too.
While Wraith uses the term joint venture, he is in fact referring to a variety of structures covered by that phrase. Some ventures might include all labour and machinery, as in the case of Brixworth Farms, while others might simply share a combine or potato harvester and others might pool equipment to use for contract farming.
To get BFC off the ground, the initial parent businesses supplied loan monies or sold machinery to the joint venture. They also sold machinery at a sale and used the cash to fund the loan.
In effect, each of the three put some machinery directly into the joint venture and the value of that was adjusted with cash, so the balance sheet started off with machinery as assets and the value of the machinery as liability.
Costs are pro-rated to the acreage of each venturer. Profits retained over and above are rebated back to the parent companies also at a pro-rated level.
Many Canadian joint ventures appear to be quite informal, and according to information from the Ontario Agriculture Ministry about joint ventures, one of the advantages is that dissolution is simple within the confines of agreed-upon terms. But Matts sees a danger in making things either informal or simple.
It is very important to sign some kind of legally binding contract, Matts says. BFC has memorandums and articles of association in place, and members have a contract for their services. It has to be locked in because it would leave a gaping hole if one party left in a hurry, Matts says. You can still leave, or die, but the agreement allows time for adjustment.
The most interesting thing here is our equal voting rights, Matts says. In their case, BFC gives equal votes to its shareholders irrespective of farm size. In fact, the estate that came in four years ago has 50 per cent of BFC s acreage, but only 20 per cent of the vote. But, says Matts, they can serve notice if they like, so it s in our interests to be careful where we go. We have to satisfy their requirements or they might pull out& . We consider ourselves shareholders and we have to satisfy the shareholders collectively and individually.
If Matts sounds confident about the business advantages and structure of BFC, he is equally comfortable speaking to the production and marketing ends of the business.
Because fields are fragmented and small, cropping is done in geographic blocks regardless of who owns the land. So it s blocked and cropped in a sensible way, Matts says. It allows diversity in the business, but economies of scale at the same time.
And while he admits maximum economies would be found in a single manager situation, all the landowners at BFC, with the exception of the estate, are part-time managers. We work within the management constraints of having more people involved, Matts says, adding, there has to be at least some chemistry amongst those involved.
BFC markets as one company. We re able to attract serious buyers because they know our standards and only have to deal with one person, Matts says. We work closely with the next link so that we are both horizontally and vertically integrated.
While some analysts consider the joint venture a potential vehicle for succession planning, Matts sees it as a potential disadvantage. Succession planning can be awkward, because we are family farms and you can t just appoint your own son to take over the joint venture, he explains. In our case we recognized the issue right from the start and asked the question. We decided the next generation can be involved provided any individual can bring something to the table.
Another disadvantage is the increased administration associated with setting up and accounting for the joint venture. The joint venture and the parent business must each maintain their own set of books. There is a little more bureaucracy with meetings and the fact every transaction requires a paper trail, Matts says. But this is a positive as well because the records are very good and can translate to each business. All money is accounted for and auditable.
Savill s Wraith says that despite recent buoyancy in the U.K. market, farmers continue to look at opportunities for collaborative farming. He believes this is because, although margins have improved in the past couple of years, volatility is unprecedented.
Canadian farmers might nod their heads, but in the U.K. some commodity prices can swing as much as 80 per cent within a season as the English internal market responds to events in larger markets like our own.
Besides tackling volatility, English farmers are also trying to address their aging farm population, and the resulting tax worries. Provisions under Inheritance Tax Relief discourage letting land because of tenancy requirements. Many of their tax laws depend on tenancy and an active farm interest, so whether it s contract farming or a joint venture, farmers are very conscious to set agreements to retain land which ensure at least the appearance of farming, and can demonstrate through the revenue side that they are still involved on at least a decision-making basis, Wraith says.
Paper farmers? Maybe.
Along with the joint venture, there are other commonly used vehicles of collaboration in the U.K. The interesting thing about them from a Canadian perspective is that the agreements are built around the landowner and not necessarily the producer, which is largely done to comply with tax requirements.
Whether to address growing land costs, production needs or tax questions, the English have developed a plethora of ways to structure their farm businesses. The U.K. Department for Environment, Food and Rural Affairs defines some of them.
In a contract farm, the farmer and the landowner each run their own businesses. Unlike in a joint venture, they don t form a new partnership. Instead, the contract farmer pays a fee to the landowner for use of the land and any other assets as built into the arrangement. The landowner pays a fee to the contract farmer for farming the land. Any residual profit from the sale of crops or livestock (which are usually owned by the farmer) is shared between the two parties at a pre-arranged rate.
In share farming, you effectively have one business run by two people, the farmer and the landowner. Each party provides capital or resources into the arrangement. There is no transfer of money between the two and profits from the sale of produce are divided between the parties at a pre-arranged rate.
In machinery and labour rings are versions of joint ventures. With a machinery ring, the individual members provide machinery for use by the ring or the ring collectively owns machinery in its own right. Labour rings follow the same principle.
A joint venture agreement is not an off the shelf kind of thing, says Wraith. Decide what it is you think you want, and work the documentation around that.
Also, he says, be sure that you re absolutely clear from the outset about your payment structure, and the reasons and conditions for individuals to get out of the joint venture.CG
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We consider ourselves shareholders, says Britain s top joint venturer Charles Matts
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THE JOINT VENTURE, AND BEYOND
Selling consortiums, machinery co-operatives, 30-year lease arrangements… could these really be the future of your farm?
While receiving a lot of press lately, the joint venture isn t the only type of alternative farm business arrangement to consider, says Jennifer Stevenson, business finance program lead with the Ontario Agriculture Ministry.
Stevenson s department is currently examining how partnerships, joint ventures, co-operatives and other alternative business structures might be used in agriculture and for what purposes. We have to think outside the box on this, she says.
Why? You might well ask.
Traditionally farmers have looked at each other as their competition, but increasingly they see overseas production as their real competition, Stevenson says. In order to meet that challenge, producers need to address the issues of market volatility and the unpredictability in both costs and revenues.
On the cost side, a collaborative arrangement provides more opportunity to forward contract on things like transportation, fuel, feed and fertilizer. If you normally buy fertilizer in February and May, a larger group can determine future need and presumably get a better price that s locked in. It provides predictability to farmers and to lenders, Stevenson says.
The same is true on the revenue side. A group of farmers can anticipate certain yields and quality, pool their production and look at marketing and transportation on a forward basis, again providing predictability.
This predictability then lends itself to better cash flow management. If you can get arrangements in place, you have more control over cash flow because things are much more predictable. This in turn attracts lenders as does the fact the individuals now have increased capitalization, Stevenson says.
Alternative business arrangements are simply one more business tool, and are useful regardless of size or sector, Stevenson says. What matters is that it provides adaptability and flexibility.
While Stevenson hasn t personally seen many joint ventures among farmers, she does see an appetite for sharing machinery in some form of co-operative.
And while current farmers can benefit from the adoption of alternative structures, so too can those looking at succession planning. Young farmers can establish a co-operative and buy in, or a joint venture with the current landowner, or a hybrid with longer-term leasing, Stevenson says.
There might also be an underlying driver that runs across the entire country arising out of the fact that the capital gains exemption tax applies only to those lands sold or transferred within family. With more non-family entrants into farming, arrangements could be made for long 20-or 30-year leases pegged to the consumer price index, Stevenson says. Such leases would than act as an annuity for the landowner, who can then bequeath the land to non-farming family members who would then profit from it.
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MAKING IT WORK AT THE BANK
While Canadian farmers certainly aren t stampeding to their lawyers and accountants to set up collaborative farm business agreements, some farms are quietly developing such arrangements with some success.
Most recently the focus has been on the joint venture, a term that Ontario s Agriculture Ministry rather vaguely defines as a business relationship where two or more persons carry on a business with a view to make a profit.
Don Roberts agrees that farm interest in joint ventures is growing. Roberts is senior vice-president and associate partner in the deals practice at PricewaterhouseCoopers Canada in Calgary. He is also co-leader of their National Agribusiness Group.
Roberts also has a simpler way to capture the essential difference between a joint venture and a partnership.
The joint venture is an operating structure and a partnership is more related to assets, Roberts says. In a clear joint venture agreement, the revenue and expenses are on the joint venture statement and the assets belong to the venturers.
But, adds Roberts, the options on how to set up a joint venture are limited only by your imagination, and they can be between individuals, partners or corporations
Having said this, the few joint ventures Roberts has seen mostly in Saskatchewan are set up to realize economies around farmland and equipment, with most assets remaining with the parent companies. And while he says we recommend it be papered to outline the purpose of going into it, the operating terms of reference and how it might be dissolved, Roberts acknowledges most joint ventures operate informally.
Because the joint venture makes sense from a borrowing perspective, Roberts says, the effort and money put into having it papered with the help of professionals will be appreciated by your bank. The joint venture will have its own set of books, separate from those of the parent companies, and this may change how the operating loan works. For example, the joint venture may have the operating loan with the venturers guarantee backed by their inventory. With everything spelled out in a well-defined and accurate agreement, Roberts says, it s an easier structure for the banks to get their head around.
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A joint venture agreement is not an off the shelf kind of thing.
Andrew Wraith
