Your Reading List

Joint Success

It’s a question that Myron Teneycke asked five years ago, and the joint-venture owners of STR Farms at Young, Sask. haven’t looked back since. Nor has the farm. It has grown — going from 8,000 to 11,200 acres — and its staff has grown too. Today, STR pays a full-time managing couple, plus three full-time employees and seasonal help.

Teneycke has also managed to maintain ownership in Saskatchewan agriculture through his retirement, which in his mind is a critical success.

But there could be something much more important. In an industry that is trying desperately to keep up investment, and that is also trying desperately to attract young people and to maintain its roots in the rural community, joint ventures such as this might be a new model for how to build a successful farm.

“Joint ventures are not rare in business, they’re just rare in farming,” Teneycke says. “Ours is the only one I’m aware of in the province that’s working in the way we are doing it.”

Teneycke grew up and farmed for 30 years near Young, obtaining a business degree from the University of Saskatchewan along the way. He spent 20 of those years as consultant and farm adviser with Agriculture Canada and Meyers Norris Penny and has now retired to Vancouver Island where he watches the performance of STR from afar but with a keen eye to its operations.

Let’s be clear. Teneycke still owns his farm in Saskatchewan. The joint venture doesn’t change ownership, only the management of the farm. According to the Canada Revenue Agency web information “a joint venture exists when two or more people agree to contribute goods, services or capital to one business enterprise… Currently, joint ventures are governed by the contract between the parties involved.”

In the case of STR Farms the contribution was made in land, storage and equipment.

The idea to engage in a joint venture was a result of Teneycke’s experience helping others with farm succession planning. “Sometimes people get succession planning mixed up with estate planning or wills. I’ve been convinced for a long time that a lot of people don’t give it enough thought.

“The discussion I had with them (clients) was to say you’ve done well, you’ve got a farm worth several million dollars, and now you want to take it, sell it off and invest the proceeds in something you don’t understand (the stock market), and see what happens,” Teneycke says. “I asked them if they were willing to invest in an industry they know, with people they trust — their kids — and see if that’s a better strategy.”

When it was his turn to give up the operational side of farming, local circumstances arose that presented an opportunity for Teneycke to take his own advice.

The background

Childhood friend Ron Russell is a corporate lawyer, business manager, and farmer. Russell found himself in circumstances where he wanted to maintain the family farm, remain close to the community and provide his elderly parents with what Teneycke calls a “soft landing.”

Meanwhile, Barry Shouse was a consulting client and had a long-term personal and farming association with the Teneycke family. Shouse was younger, wanting to grow his own business and have a better farm. He and his wife Sherry are now owners in and managers of STR Farms.

“All three of us knew each other well, but we were not related at all,” Teneycke says.

That’s when he popped the joint venture question.

And so began the planning process between the consultant, the lawyer and the active farmer. It would appear to be a perfect trio of expertise to tackle the job. “Maybe it’s a rare set of circumstances,” Teneycke says, “but then it’s easy to copy. Once you get it in your head that it’s a sensible thing to do, everything else becomes detail.”

The structure

The venturers are pretty clear on the detail. A scorecard assessment determined the financial position of each farming business. Each owner outlined a value equation indicating what they intended to get out of the joint venture. From there the trio set out a vision with four distinct goals: the joint venture would be a money-making business, a good member of the community, and a good employer providing long-term jobs.

Perhaps most importantly, the joint venturers would share risk.

“It’s the major thing you have to agree on, the idea you will share risk to the nth degree,” Teneycke says. “There is no ‘my land,’ ‘your land’ kind of thinking anymore, even though the parties retain ownership of their respective land, crops and production.”

Rather than using shares as a measure of investment, the venture worked out a unit of contribution to be one acre of land plus appropriate storage. That has since changed so at present the joint venture buys all storage and it is then paid for based on each venturer’s percentage of land in the enterprise.

In fact, percentage of land contributed is the basis for pretty much the whole thing. The value of the land from each farm was tested for any kind of inherent weaknesses, Teneycke says. Finding no differences that weren’t related to seeding dates or rain, the group decided to farm the land together as a unit with no differentiation as to how or when it is farmed.

Following from that, all costs and revenue are calculated based on percentage of land contributed to the joint venture. If one chooses to acquire more land, he would simply then pay a higher portion of the management fee and all costs associated as a percentage.

Equipment was calculated similarly. Any overcontribution by one owner was owed to that individual as a loan. “It brings everything into line,” Teneycke says.

“If you took the weighted average of each farm and multiplied it by the total value of the joint venture you’d know each venturer’s share. It makes it fairly easy to wind down if you wanted to,” he says. “But in theory it should never wind down.”

Teneycke insists a joint venture requires good accounting that is transparent to all involved. STR Farms owners all have access to view bank accounts, end of month reconciliation and financial statements, he says, but they do not individually handle any money. It all goes through the joint venture. The management fee is paid prior to assessing year-end profits and “before the joint venture partners get any money the bills get paid,” he says.

“All money flows back to the individual farms. This is not a separate legal entity, but a way to operate,” he says, adding that almost all accounting and law firms operate in this same way.

The trio has an annual major planning session in the fall to evaluate farm performance, check what’s happening against their value equation, make projections, set out future plans and anticipate problems.

Can joint ventures save the family farm?

Myron Teneycke makes no such claims. But he does have opinions about the potential of joint ventures to allow new entrants into the business and to aid in succession. That potential, however, can only be reached if farmers can change the way they think about ownership and management.

Teneycke would like to see farmers leave their money in the business of agriculture instead of investing the proceeds of their life work into something they know little about. “People who have equity in the (farm) business have to stop thinking about taking the cash and instead stay invested,” he says. “You can get cash out but not all at once.”

The farm has to service debt and operate, he says, so we have to ask ourselves how can we get there? The answer: “We have to get away from thinking about ‘what’s mine,’” he says. “People have to stop acting like proprietors and start acting like shareholders. If they don’t they lose efficiencies and opportunities.”

In fact, the guidelines for establishing joint ventures reads, “Each joint venturer has a fiduciary responsibility, owes a standard of care to the other members, and has the duty to act in good faith in matters that concern the common interest or the enterprise. A fiduciary responsibility is a duty to act for someone else’s benefit while subordinating one’s personal interests to those of the other person.”

That might require a sea change in farmer thinking. It might mean adapting the practices of other industries to agriculture. In setting up their enterprise, STR Farms used concepts Ron Russell witnessed while dealing with the oil and gas industry. The group believes agriculture can only gain by looking outside the proverbial box for innovative ways to operate.

Teneycke cites the standard farm succession dilemma as a reason to consider ideas beyond the norm. The son wants to take over the farm, but the son doesn’t have much cash. In a joint venture he could be paid to run the farm, mom and dad continue to receive income from farm operations, and the son’s first priority doesn’t have to be buying dad’s land.

In fact, in a join venture, Teneycke would say the last land you want to buy is that of another joint venturer. “You incur debt to grow the business so why buy what you already have?” he asks. “It’s a weakness in current succession planning. As soon as you can do more you have to do more. It is the reality of today’s agricultural climate. It would be nice to be small, but that’s not happening.”

Sylvain Charlebois agrees. Charlebois is associate dean of the college of management and economics at the University of Guelph. “My sense is that in order to compete we need to build on economies of scale, look at machinery and technology and be more productive than ever.

“A joint venture allows farmers to congregate, collaborate and synergize to build a system for the function of farming to deal with issues of price-taking and other vulnerabilities,” Charlebois says.

“By managing resources together they will achieve a better return on investment. When they do this they truly become investors, strategists and business people,” Charlebois continues. “They are not just stewards of the land anymore, they become stewards of their business, allowing agriculture to create wealth, allowing land to create wealth.”

Another strength of the joint venture is the structure allows for separation of function. Think of an accounting firm where appointments are made amongst partners and then each is left to do their job. Separation of function makes it much easier to introduce someone new to the business.

And Teneycke believes the more people involved, the more expertise you have. “You need people with skin in the game,” he says. “Advice without risk or reward is kind of generic.”

So while it may not be for everyone, the joint venture provides a fascinating option under the right circumstances.

Teneycke sums it up. “A joint venture allows for economies of scale, new entrants to the business, a clear way of defining contributions and rewards, separation of function and a structure that views management as different from ownership.”

So he returns to a question. Which of course is the same way he started. “Are you up for a different way of thinking and spending time on how you manage the business?”CG

———

“ Joint ventures aren’t rare in business, they’re just rare in farming.” — Myron Teneycke

About the author

Anne Lazurko's recent articles

Comments

explore

Stories from our other publications