Why would a farmer enter into a joint venture?

There are several reasons a farmer might consider setting up a joint venture: they may need more resource (monetary, machinery or simply more manpower); it might enable an aspiring farmer to get a foot on the farming ladder (which would otherwise be prohibitively expensive); and a JV can help a family farm to navigate a potentially difficult period such as a death in the family.

Regardless of the reason, JVs are bespoke agreements which reflect the circumstances of the contracting parties and clearly set out their respective rights and responsibilities.

Main types of farming joint venture

The most common types of JV within the farming sector are:

  • Contract Farming
  • Share Farming
  • Partnerships

Contract farming

This is an arrangement where a landowning farmer employs a contractor under a contract in which the contractor will provide labour, machinery and management expertise for the farmer’s business. The farmer will usually provide the land, buildings, fixed equipment, livestock (if any) and meet business overheads.

The contract will set out the details of the arrangement, providing clarity and certainty regarding each party’s obligations and responsibilities as well as payment provisions, which usually involve the contractor receiving a fixed annual payment and an agreed percentage of the net profits. Although contracts of this nature are often short term, it is up to the parties to decide on their duration.

Contract farming is beneficial to both parties: it effectively allows the farmer to control farm policy and delegate farm work; and allows contractors to maximise economies of scale by providing their services to several farmers without having to invest in land or other high value fixed assets associated with farming.

Share farming

Share farming describes the arrangement where the landowner and incoming farmer will farm the same land as self-employed share farmers, each carrying on their own farming business and being responsible for their own business accounts and tax returns.

Usually, the landowning farmer will provide the land, buildings and fixed machinery while also paying a percentage of certain input costs. The incoming farmer will provide working machinery, moveable equipment and technical ability while paying the remaining input costs.

The relationship is governed by a Share Farming Agreement in which the parties will agree the proportions in which they will share costs (inputs), responsibilities and the value of the output of the land, usually income from sales.

Share farming is usually a medium or long term arrangement between the parties. Such arrangement is typically beneficial for a landowning farmer who wants to reduce their day to day operational involvement in the business but ultimately wants to retain management responsibility. Similarly, share farming is considered to be ideal for a new farmer who wants to run his own farming business but does not have any land.

Partnerships

A partnership is defined at law as ‘the relation which subsists between persons carrying on a business in common with a view of profit’. Most commonly adopted between family members, a JV farming partnership would involve partners sharing the risks, costs and responsibilities of running a farm.

The extent to which risk, costs, profits and responsibility are apportioned should be agreed between the parties in a Partnership Agreement. However, if there no legally drafted Partnership Agreement, the partnership will be governed by the default provisions of the Partnership Act 1890 (which, if triggered, can jeopardise the future of the farming business). Not only are partnerships popular within family farming businesses, they are also commonly used by non-landowner investors who want to make a return on capital.

What to include in a joint venture agreement

Regardless of the type of joint venture agreement, there are a number of key provisions that should be considered by the parties.

Responsibilities

Agreeing and detailing the responsibilities of both parties to the JV must be included in any agreement. Both parties should know precisely what is expected of them so that workload is neither duplicated nor disputed.

Profit and loss

The extent to which profits and losses are apportioned should be clearly agreed at the outset of any JV to reflect the contributions and commercial aims of the parties. Consideration should also be given to potential periodic reviews of profit and loss apportionment to reflect the subsequent understanding between the parties.

Termination

Mechanisms need to be incorporated in any agreement which specify why, when and how either party is able to terminate the agreement. Similarly, the inclusion of a dispute resolution procedure should be agreed to allow for swift resolution in the event of a dispute arising. A smooth exit from the agreement will enable both parties to assess their next steps and proceed as cost effectively as possible.

Summary

The high cost for aspiring farmers to start a farming business makes JVs very attractive and it is likely that the use of such structures will become more and more common. Nonetheless, to ensure that they work for both parties, it is vital that Joint Venture Agreements are properly considered and scrutinised so they reflect what both parties want to achieve, both during the life of the agreement and after its termination.

About the author

Robert Lee Partner

Robert is a corporate lawyer specialising in shareholder agreements, company law, corporate finance, restructuring and refinancing, buy outs, mergers and acquisitions and takeovers.