Joint ventures are an opportunity for Agriculture

In many areas, arable yields have been compromised by drought, and margins have been squeezed remorselessly by the dramatic rise in the cost of inputs and energy. Those running intensive livestock enterprises have struggled with rising feed costs, far outrunning output prices.

In every sector of UK agriculture, all farmers are facing the same major challenges to a greater or lesser extent: The impending review of farming subsidies and the expected reduction in the direct payments available to farmers; input cost inflation, particularly fertiliser, feed, fuel and electricity, and significant increases in the cost of new machinery; the ongoing shortage of good quality skilled labour, particularly in the livestock sectors; and the focus on Net Zero and reducing GHG emissions, bringing operational challenges and potential cost implications to all farming businesses.

These challenges will not lessen. Already, grain prices are beginning to soften and there is a risk that arable margins will begin to come under pressure if fertiliser and fuel prices remain high.

We are beginning to see an increasing focus on environmental measurement from food buyers, be they supermarkets or food processors.

In these circumstances, many farmers will be looking at ways to reduce costs, improve efficiency, manage/reduce risks, and secure their long-term future. In the past, this has often meant a move to contract farming arrangements and other types of joint venture, and this is something many farmers may need to look at in the future.

Contract farming arrangements have been common in the combinable crop sector for many years. In these agreements, the landowner provides the land, buildings, and sometimes fixed equipment (grain driers for example), with the contractor providing the labour, machinery and crop growing expertise.

A designated bank account is set up by the landowner that pays for all crop inputs and some agreed overheads. Both parties then receive a first charge or fee normally calculated on a £ per acre basis, with any profit remaining split on a pre-agreed basis.

Generally, the contractors’ first charge is set at a level that does not cover costs, so they have a strong incentive to manage the crops well to ensure a good profit is generated. If done well, contractors can make significant returns and can expand their operations with minimal working capital required compared to renting land.

The landlord benefits as well, actively farming but taking less risk, reducing day to day involvement in running the farm, and often able to sell machinery to raise capital.

Machinery sharing is another popular form of joint venture. Agreements range from fairly informal arrangements to share a combine across two or three farms, to a full company structure with all machinery for several farms pooled in a limited company which then provides services to the farmers.

This has obvious benefits in terms of spreading the costs of large items across more acres, but should also create additional efficiencies by reducing duplication of machinery and facilitating the use of higher output and larger machinery than could be justified by the individual farmer.

In my experience, a key feature of successful examples of these types of arrangements is that they benefit all parties and there is a good fit between the parties for their business and personal objectives.

A good example is a farmer wanting to retire linking up with a neighbour who has the desire and capacity to expand, perhaps to ensure a role and sufficient income for a son, or daughter coming home to farm.

There are also opportunities for joint ventures in dairying and livestock businesses, with contract farming agreements and machinery sharing arrangements in place but perhaps not as widely adopted as in the combinable crops sector. Given the challenges of labour availability and – particularly for beef and sheep – subsidy scheme changes in these sectors, joint ventures may well offer a solution to improve business returns and give new entrants a first step up onto the farming ladder.

We can also use the challenges as an opportunity to be more creative and perhaps look at how farmers are developing new arrangements in other countries. Share milking, for example, is well established in New Zealand and is often the route for young farmers to get their first opportunity to build a business and an asset base.

There are two main types of agreement: 50:50 share milking, where the share milker owns the cows and splits the milk income equally with the landowner; and variable order share milking, where the share milker does not own the herd and receives a smaller share of the income.

Share milkers often gradually buy out the landowner or farmer, or move their cows to a larger unit. Contract milking offers a variation on the joint venture agreement where the contract milker is paid a fixed price per kg of milk solids produced.

Every farming business is different, so it is important to consider all stakeholders in a potential joint venture, and it is essential to take appropriate professional advice to ensure any decisions are thoroughly researched and any agreements are properly documented. This includes your bank manager as they will ensure any facilities required by the new venture are properly structured and sufficient for the business’s needs.

The past few years have demonstrated just how quickly and significantly global and national events can change the agricultural landscape.

The only certainty is that change and challenge will always be present, and businesses will need to come up with ever more inventive and entrepreneurial ways of facing these challenges to secure a successful long term future. In the right circumstances, a joint venture may well offer opportunities to do just that.