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Alternative Business Models

Guy Plenderleith, an agricultural business consultant in the Bury St Edmunds office discusses how farmers can collaborate through machinery sharing and contracting agreements and highlights the benefits that can be achieved.

Since our last edition shortly before the Cereals event, the political world has changed dramatically, as the UK has voted to leave the European Union. This has inevitably produced a significant amount of short to medium term uncertainty, both agriculturally and in the wider economy. Whilst we at Brown & Co have been careful not to launch any knee jerk reactions, the situation does further highlight the importance of the topics and opportunities that have been highlighted in this series.

As always, should you wish to discuss anything within this article, or any of the previous articles in this series, please do call your local office and we would be delighted to speak to you.

Machinery sharing agreements

Machinery sharing can offer advantages for all sizes of businesses. It works particularly well for small farms that can identify savings that can be implemented in a relatively straightforward manner.

As well as reducing costs, machinery sharing can also provide an opportunity for smaller farms to upscale their kit and take advantage of the latest technological advances that might otherwise be beyond their reach.

This benefit should not be underestimated, given the rapid uptake of precision farming across the arable sector and the competitive advantages it can bring.

So how does this work?

Many farmers are not used to the idea of co-operating in a formal way, so the practical implications of machinery sharing must be thought through before embarking on any agreement.

Often the sharing partners will be neighbours who know each other well. However, they must also be sure, as far as is possible, that they can form good working relationships to maximise the chances of the agreement working smoothly.

This will help overcome practical implications, such as who has first call on a machine when the chips are down. For example, baling silage or hay in a catchy year could be fraught, so everyone will need to keep their head.

Partners can introduce safeguards to help ensure gains and pains are spread equally. If a combine is being shared, drying costs could be pooled and apportioned pro-rata by tonnage. Many contract farming agreements include such a provision, so it is a proven model.

A more advanced agreement might include provision for loss of quality and the impact this has on price, though this would increase administration. It could be made simpler where members belong to the same central store.

Smaller scale machinery sharing agreements often share ownership and maintenance of individual machines, with each party contributing on a per hectare basis.

Larger scale agreements, perhaps where several farms jointly covering several thousand acres have agreed to create a tailor-made machinery fleet, will need to adopt a more corporate model.

Although such arrangements are less common, they can create substantial benefits and are worth considering, particularly among like-minded businesses.

Arrangements will be governed by the practicalities of what the agreement involves. An umbrella company, perhaps a limited liability partnership, is likely to be the best vehicle to manage affairs.

Participants draw up a list of required machinery, agree what existing kit can contribute to this and purchase the rest. Individual farm businesses sell off their surplus machinery, perhaps under a joint machinery sale to attract the best audience.

Participant businesses supply working capital pro-rata and a small surplus, perhaps £10/acre, to cover unforeseen eventualities. Each business then pays a flat-rate contract fee based on acreage and a small management fee on top. It is important to maintain the integrity of individual farm businesses for tax planning and RPA purposes, so they need to be trading properly.

On a practical note, and subject to BPS rules, block cropping can help reduce costs further once the arrangement is in place. Sale proceeds of all crops across the whole farmed area can be pooled and shared out pro rata to smooth seasonal cash flow and to spread risk.

Although there is still a degree of hesitancy to enter into these types of agreements, perhaps due to perceived loss of control or the need to keep a range of machinery “just in case”, the mindset is changing, particularly among younger farmers.

They realise farm businesses cannot afford the luxury of owning several small machines where part of one bigger one will do the job as well. It is very likely that machinery sharing agreements will become more popular.

Contract Farming Agreements

For some, the option to enter into a full Contract Farming Agreement satisfies many of their objectives – releasing capital, less day-to-day involvement, remain trading with the tax and VAT advantages, benefitting from the contractor’s economies of scale, to name just a few.

This type of agreement is a formal business arrangement relying on a good working relationship with a trustworthy and capable farmer.  It is important that they are set up properly and structured, where possible, to deal with both the exceptional and poor years.

CFAs are now very commonplace, with well-rehearsed processes and systems to ensure that they operate as intended.  Like FBT rents, rates set in the recent past were well ‘leveraged’, but now with recent low prices are definitely focussing minds.

This model of joint venture is flexible, and can take into account specific business and personal circumstances. It is always important however, when drawing up agreements which vary from the tried and tested formula, to seek legal and accountancy advice to ensure that the proposed format does not jepodise the trading status of the farmer.

In the current economic climate, and with the uncertainties created by Brexit, we expect to see more and more farming business looking at these types of arrangements.