7 April 2000

Dairy joint ventures could be way ahead

JOINT ventures could be one way for more milk producers to secure a future in dairying with possible savings worth 1.5p to 2p/litre.

Thats according to farm consultant Teresa Dent of Strutt and Parker, Sailsbury, Wilts, author of an MDC report, Restructuring to survive: Opportunities for dairy farmers, published last week.

Mrs Dent says these opportunities include tenancies and joint ventures such as share farming, contract farming and farm business partnerships: All could allow producers to exploit economies of scale, mainly though savings in overhead costs and pooling technical expertise.

"These arrangements are popular and effective in the arable sector; it is surprising the dairy sector has not taken them on. This may be because it is easier to move grain than cows and fewer facilities are needed."

The arable sector has also suffered greater financial pressures historically and its recent downturn in prices started before milk prices fell.

In joint ventures both parties must take on risk and be involved in the business. Otherwise it ceases to be what is intended and there may be tax implications.

"You can structure an agreement so the risk is reasonable to both parties, although in the worst case it is possible that one party could lose all their money," she warns.

There may also be a difficulty with facilities and investing in improvements, although with some imagination these can often be overcome, adds Mrs Dent.

She believes that contract agreements and partnerships are likely to be more popular than share farming. Milk quota makes share farming here more complicated than in other countries, such as New Zealand.

"None of these agreements is an excuse to take capital out of dairying by selling quota. If you want to do that it is better to quit dairying."

Deciding whether to leave all assets in dairying is an important consideration for those looking into joint ventures or becoming a landlord.

Any venture must produce a business big enough to provide a return for both parties. It is important to complete your own budgets and to view it as a business venture. Also take professional and taxation advice, she warns.

"And when the debt of either party is high, you must ensure restructuring allows the debt to be paid off for a sustainable future. But there is nothing to stop an owner-occupier in debt moving to a bigger farm as a tenant or entering in to a joint venture which allows sale of land and buildings."

&#8226 Copies of the report are available from MDC publications (01285-646510).

JOINT VENTURES

&#8226 Economy of scale.

&#8226 Saving overheads.

&#8226 Pooling technical expertise.

Farm business partnership example budget

Farm A Farm B Partnership

Cows 70 125 195

Acreage (acres)94 168 262

Sales (litres) 455,000 968,750 1,423,750

Income (£) 77,900 165,738 243,638

Variables (£) 35,352 72,850 104,302

Overheads (£) 39,222 66,560 85,390

Profit (£) 3,328 26,328 53,946

Profit (p/litre) 0.73 2.72 3.79

*Source: Restructuring to survive: Opportunities for dairy farmers; MDC 2000. Based on a milk price of 17p/litre.

Farm business partnership example budget

Farm A Farm B Partnership

Cows 70 125 195

Acreage (acres) 94 168 262

Sales (litres) 455,000 968,750 1,423,750

Income (£) 77,900 165,738 243,638

Variables (£) 35,352 72,850 104,302

Overheads (£) 39,222 66,560 85,390

Profit (£) 3,328 26,328 53,946

Profit (p/litre) 0.73 2.72 3.79

*Source: Restructuring to survive: Opportunities for dairy farmers; MDC 2000. Based on a milk price of 17p/litre.