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Farming Joint Ventures
- AuthorIan Barnard
It is common knowledge that it can be difficult for young farmers to get a foothold in agriculture, and with the average age of farmers in this country just under 60, at the other end of the scale, it can be difficult for those farmers looking to retire to see a way out. There may also be practical reasons why existing farmers do not want to work their land or they may simply be unable to.
One possible solution is to consider a joint venture farming agreement which has the potential to help all parties involved. This allows existing farmers to take a step back from the day to day work but also could provide an opportunity for younger farmers to take on management responsibilities, gain experience and get a foothold on the ladder to owning and running their own farms.
There are two main types of joint venture agreements – a share farming agreement or a contract farming agreement both of which have different pros and cons. Both agreements will rely on the parties be willing and able to work together to create a successful business relationship.
Share Farming Agreement
In a share farming agreement, the two parties share the input costs and revenue whilst running two separate businesses. In a typical arrangement the owner provides the land, buildings, fixed equipment, and expertise whilst the operator provides the labour, energy costs, equipment and contributes towards the working capital of the arrangement.
Each party shares both the risk and reward of the arrangement, depending on the agreed terms within the agreement. The main advantage for the owner is that retains full tenure and possession of the land allowing Agricultural Property Relief to be maintained from an inheritance tax point of view. The advantage for the operator is that it can establish a presence in the agricultural world without risking too much capital and gaining experience and knowledge from the owner.
There is also chance for the relationship and structure to be enhanced for the operator if the owner is looking to retire, with the operator taking a more prominent role as the agreement progresses and they ‘re-invest’ any profits.
This type of agreement allows the operator to bring energy and ambition to the working relationship whilst the owner provides their experience and know-how, which is then passed on.
Share farming agreements tend to be more complicated than a contract farming agreement simply because it is essentially two separate businesses running side by side, and there is also no guarantee of income for either party and so tends to be a more risky scenario.
Contract Farming Agreement
A contract farming agreement is a ‘true’ joint venture in that it brings together two parties running one business. The farmer provides the land and the buildings whereas the contractor provides the labour, machinery and power.
One bank account should be set up by the farmer which pays all the inputs and receives all the income. The contractor is then guaranteed a basic fee through the year, with the farmer taking a small payment at the end of each year, before any surplus is ascertained at the year end. This surplus is then distributed between the parties in accordance with the terms of the agreement.
A contract farming agreement is a good option for a farmer looking to scale down their physical operations on the farm, whereas contractors will receive a guaranteed fee throughout the year and benefit from use of an established farm and the experience that goes with it.
Providing that the decision making lies with the farmer, Agricultural Property Relief should still be available, and the farmer will also benefit from subsidy payments although as the responsibility for cross-compliance and stewardship agreements remains also with the farmer, it should be made very clear to the contractor what they can and cannot do, within the terms of the agreement.
Whichever agreement is chosen, it is particularly important that the finer details of the agreement are negotiated and correct at the outset so that each party knows what to expect from the relationship. Therefore, it is important to obtain legal advice before entering into any such agreements so you can be certain of any implications for you. If you would like more information on joint venture farming agreements and for us to review them before you enter one to ensure it meets your needs, please contact a legal advisor in our Agricultural Team on 01653 600070.