With labour and machinery accounting for about 70% of overheads, capital employed in machinery, at about £590/ha, is more than double that of variable costs. Machinery is, therefore a prime target for rationalisation.
That’s why the popularity of labour and machinery syndicates has risen dramatically over the last few years. Many have resulted in opportunities for suitably qualified and motivated young farmers to take over the management of large farming businesses.
The basic concept
A number of neighbouring farmers jointly and equally run a partnership or company that provides contracting services to their farming businesses. The services could range from one machine such as a sugar beet harvester or combine harvester to all the operations required by the businesses. There are several basic efficiency principles:
- A syndicate allows the businesses to completely start again with their machinery systems often employing the latest minimal tillage techniques. Selling unwanted machinery at a public auction releases capital
- Bigger, more efficient machinery can be justified on the larger area (often several thousand hectares). For instance one combine may replace several older machines previously operated by each member
- The capital of the syndicate is funded in proportion to the acreage farmed by each member
- Ideally labour should be charged in from the members at an hourly rate which allows direct labour to be calculated accurately and a further assessment of labour requirements made in the second season
- Farmers themselves can continue to carry out as much physical work as they wish as long as it is planned
- Margin from the crops can be shared by the members and equalised between them through a share farming arrangement allowing the total acreage to be farmed under one rotation
- Specialist machinery, such as sugar beet harvesters, can be funded at a different percentage within the syndicate based on relevant acreage. Equally contracting income from the sugar beet harvesting can be distributed to the members in the same proportion.
Often one or two of the younger members of the families or a new, non-related entrant, can operate as working managers, being paid an acreage management fee in addition to their hourly rate for machinery operations. They can be mentored and overseen in the early stages of the agreement by nominated, senior members of the syndicate.
An important principle of a successful syndicate is chemistry between the people. All parties should thoroughly discuss potential implications and the assistance of an experienced professional at this stage is essential.
The following is a brief run through of the steps that are required together with the targets:
- Draw up a list of machinery required to efficiently grow crops on the total acreage – the target is a maximum value of £445/ha. The average on the individual farms is likely to be in the region of £544/ha therefore reducing the capital by £99/ha, releasing the capital employed back to the individual businesses
- Calculate the tax implications for the individual businesses as a result of the transfer or sale of machinery and seek the assistance from a specialist accountant, there are several methods available to minimise the tax
- Decide on the entity needed to run the joint venture. The options are a partnership, limited liability partnership or a company the choice will depend upon the tax implications involved
- Ideally retain the labour employed in the individual businesses unless there is a large imbalance in labour employed and one business is responsible for a large proportion of the down time. This will enable the actual hours charged to the syndicate to be recorded and analysed after one season. The usual charge is £12.50 per hour
- The business will require VAT registration and a bank account and the books should be kept by one of the members charging around £10 per hour
- Agree who will be responsible for the day to day management and a payment of about £5/acre made for management
- A Heads of Terms should be drawn up by a suitably experienced person detailing all points discussed and agreed. This document can be varied by agreement at the agm every year.
Substantial financial savings can be made in an efficiently managed syndicate but it isn’t just about cash benefits.
Other gains reported from existing syndicates include:
- Problems can be shared
- Members with interests outside the farming business can step back from the business by agreement. This works particularly well as other members will be able to carry out the work and charge their hours
- Farming can be a depressing and lonely business and a syndicate alleviates both of these. Many individuals have stated that farming is fun again now
- Often the younger generation actually runs the joint venture thereby providing them with a fantastic opportunity
- The syndicate enables the crop rotations to be run as one on the total acreage thereby block cropping and the gross margin equalised
- This rationalisation and level of efficiency can be limited by the grain handling, drying and storage facilities available. This can possibly be overcome by the renting out of existing grain stores for commercial use and tonnages purchased in a collaborative farmer controlled grain store.