In tough economic times, collaborative ways of working with other farmers could be the way forward for some…
It is well publicised that the farming industry is going through some very tough times. The outlook for the foreseeable future offers little encouragement either.
In such circumstances, there is much talk about the need to optimise technical performance to improve output and sales, and that costs + overheads should also be critically reviewed. Doing this can often make a positive difference to the business – but nevertheless there will be occasions when it will not be enough and something more fundamental needs to be considered.
If this is the case, farming businesses might need to review their overall Business Model and look at other ways of running their farming business in collaboration with other farmers/ neighbours or contractors. Three options to consider are contract farming, share farming and running a machinery ring.
In simple terms contract farming is a joint venture between a landowner or occupier and a contractor. Each party provides different capital inputs, and they also share the cost of variable inputs and the surplus (profit). This type of arrangement is most commonly used in arable farming but use in dairy or livestock farming is becoming more common.
Share farming has the distinguishing feature that both the landowner and share farmer can be seen as separate occupiers of the land – in essence there are two farming businesses on the land. They operate separate businesses which in combination result in the agricultural output (sales). Each is apportioned a pre-agreed share of the sales and under the agreement it defines who pays for the various costs e.g. fertiliser, sprays, machinery costs etc. Typically the share farmer will provide the working machinery and moveable equipment, any livestock is held in undivided shares and the landowner provides the land, fixed equipment and machinery.
A machinery ring is an agreement between 3 or more farmers who jointly own or lease machinery i.e. tractors, combine etc. Each member would have agreed use of the machinery and would either pay a “rent” to the ring or an agreed proportion of the running costs. When a piece of machinery is sold any resulting profit or loss is apportioned between the ring members in accordance with the agreement. The same principles apply to any machinery purchases.
Given that the vast majority of farming businesses in the South West are family owned, the use of collaborative farming agreements has not been extensive to date. However, the dynamics of the industry are changing. In some cases unwelcome capital expenditure decisions are looming and a number of farmers are looking at how long they want to carry on farming in the way they might have done for years.
Collaborative farming not only offers options as to how to take farms forward but also offers flexibility in that any agreement need only apply to certain parts or operations on the farm.
If collaborative farming does have appeal, then discussions with both accountants and solicitors at an early juncture is to be advised to ensure both tax and legal issues are fully considered.
If you have a question or query for David Perriment, consultant in our Devon rural team please email firstname.lastname@example.org or call 01392 210700.