What to consider before entering a farming joint venture

Joint ventures can be a great way of bringing fresh ideas and enthusiasm into a farm business but care should be taken to formally set up the terms of the venture, even if the agreement is within a family.

Agreements should also be tailored to the business rather than parties relying on a standard document.

That’s the advice from William Waterfield, farm and rural consultant at Waterfield and White in Hampshire, who says a standard, generic legal agreement – or none at all – between parties can lead to catastrophe.

See also: A beginner’s guide to starting a joint venture in farming

Formalising the agreement

Mr Waterfield says joint venture agreements are largely still a family affair, with partnerships between generations or siblings the most common form.

However, even within the family, trouble can arise if agreements aren’t formalised in a written agreement.

The very act of writing down the terms of an agreement helps to raise questions that must be addressed by both parties.

If this is not done the risk is that partnerships will break down and the parties will need to resort to engaging partnership lawyers.

This is an expensive option and will often end in assets being sold and divided.

Tailoring the agreement

The terms of any joint venture farming agreement must be tailored to the business, in order to meet the requirements of both parties.

All circumstances are different, so the terms of every joint venture agreement need to be bespoke.

“There are the same broad principles – responsibilities and reward – which need to be set out clearly. Some people will want to take a back-seat role; others will say they want to remain responsible for youngstock or crop planning, for example. But no two sets of circumstances are the same.”

See also: Farming joint venture interest grows in volatile times

Contract farming

Partnerships aside, contract farming agreements are the most common, followed by share farming agreements.

For new entrants, contract farming is the most popular way in and a well-crafted contract farming agreement is easier to administer and has all the benefits of a share farming agreement.

However, depending on the expertise brought to the venture by the new entrant, contract farming might not be the right route for an established farmer looking for an infusion of new blood into their business.

“Is it someone with four or five years’ working experience? Or is it someone straight out of university? For someone with little actual farm experience, share farming might be more suitable.”

However, with any agreement – whether it be partnership, share farming or contract farming – Mr Waterfield says terms should be tailored to the requirements of each party, with particular emphasis on:

• Responsibilities and contribution
• Profit/loss share
• Ownership of subsidies
• Termination of the agreement
• Communication

He also recommends parties regularly revisit and review the terms of their agreement annually.

See also: Three growers slash labour and machinery costs with joint venture

Contribution and remuneration

According to Mr Waterfield, the most important terms of any joint venture contract are contribution and the division of profit.

Who is responsible for what and the remunerations that follow need to be understood by all parties.

Parties should also consider what might happen if or when output or milk prices rise.

See also: Farming joint venture interest grows in volatile times

“A landlord might be getting 4p/litre at the moment. But what happens in a few years’ time when the milk price is at 33p and he’s still getting 4p? He will feel miffed he hasn’t received a fair chunk of the profit.”

Mr Waterfield suggests parties build reward bands into contracts to reflect future changes in output and income.

Profit and loss

It is also important both parties know exactly who will bear the weight of any financial loss, he says.

“Normally, the landlord would bear the loss,” he says. “But there ought to be a limit on it.

“For example, what if your dairy herd picks up TB? Where does the liability lie? Always consider the worst-case scenario.”

On the matter of subsidies, Mr Waterfield says parties need to establish how to account for entitlement payments”

Typically, he says, subsidies would go to the landowner, as such payments can be activated only against land.

Termination and arbitration

To be best prepared for the worst-case scenario, those entering into a joint venture must be sure to incorporate clauses into their contract that enable a smooth exit for both parties.

There should be break clauses, termination clauses and a notice period written into any agreement.

He also recommends parties include a point on arbitration, which is often absent from written agreements.

There needs to be a clear procedure to settle disputes. This should form part of the original agreement be reviewed on a regular basis.

Communication

Mr Waterfield also recommends adding a section into contracts on holding regular meetings to encourage communication between parties.

Meetings could be overseen by a third party to ensure they take place.