Joint ventures give all generations a chance

Joint ventures, such as contract farming, cow hire, equity partnerships and share milking agreements, are becoming increasingly popular in the dairy industry.

Opportunities for outside investors, the development of herdsmen into business entrepreneurs, next-generation family partners and new entrants are providing a positive future with a sound structure and reward mechanisms.

And joint ventures allow farmers reaching retiring age to stay involved with the business, but not on the day-to-day management of the unit, says Tony Evans from The Andersons Centre. “Some types of joint venture agreements, particularly where there is no clear succession path, can be an extremely successful way of making this happen,” he says.

On many dairy units, Mr Evans says, he is seeing a lack of a clear succession paths because the next generation chooses not to become actively involved in running the business. “This is where a joint venture agreement can allow farmers to retain their assets and should guarantee a healthy return on investment, while bringing others into the business,” he says.

“Producers can hand over the day-to-day running of the farm to an enthusiastic person or group with new skills and capabilities, motivated to get the best from the unit.”

Joint ventures can also work within a family structure, adds Mr Evans. “We have begun to see more and more situations where three generations, grandfather, father and son, are all involved in the business.

“With a joint venture agreement the grandfather can get the rent, father can get a 10% return on his business assets and the son can get the involvement in the business he wants. He can develop the business as he envisages it and, once he’s paid the rent and a return to his father, he can still make a decent return for himself.”

However, finding the right business partner to enter into a joint venture is important, warns Mr Evans. “Make sure he has a proven track record and that he is a good businessman not just a good cow man. Somewhere in the region of 30% of the costs of running a dairy business are on technical performance, while 50% of the cost can be allocated to overheads.

“Make sure whoever you enter into an agreement with knows how to manage both the technical and overhead costs in a successful business.”

“When you find the right business partner to enter into a joint venture you could be looking at a return of 10% a year on your investment. For the rent of land and buildings you may be looking at somewhere in the region of £120 an acre, a 2% return on capital. But you do need to bear in mind that land values have doubled in the past 10 years, so you are looking at 10% annual asset growth as well.”

A joint venture can also be a way of solving a staff retention problem, continues Mr Evans.

“Agricultural wages are now similar to those you would receive in other industries and, unlike say 20 years ago, many farm workers’ partners now bring in their own wage. This means that in many cases for the employee income is no longer the only incentive. Instead they are looking for more job satisfaction or to be more closely involved in the development of the business.”

DairyCo models help smooth your way

In response to increasing interest on joint ventures DairyCo has developed a series of templates to provide guidance to dairy farmers who are considering a joint venture within their own or with other dairy businesses.

The templates include contracts and guidance notes on share milking, contract farming, cow hire, and equity partnerships. The guidance notes have been written to help farmers understand the practical and legal implications of setting up a joint venture, and to assess the suitability of joint ventures for their particular business.

The templates are available on request for England and Wales, with versions for Scotland in production. To find out more contact DairyCo publications on 024 7647 8702.