Joint VenturesHow to put them together

Duncan Ashby, ProAdvice

ProNet National Conference 2017

Collaboration = Joint Ventures

Joint ventures

• A joint venture (JV) is a business entity created by two or more parties, characterized by shared ownership, shared returns and risks, and shared governance.

Options for expanding – Joint Ventures

• Joint ventures:

• Trusts, partnerships.

• Collaborative farming;

• Share-farming;

• Contract Share Farming Agreement (CSFA)

• Leasing

• Co-operatives3

Farming Together – a resource for primary producers to help you value-add, build marketplace strength and boost returns.

Lifting on-farm profitability (at the farm gate and into the supply chain) by providing expert support and financial assistance to collaborative groups and cooperatives. The Australian Government has invested $14,934,000 (including GST) into Farming Together, the two-year Farm Co-operatives and Collaboration Pilot Program.

Benefits for farmersYour great idea gets independent professional advice, feedback and guidance from business experts in a variety of fields. If your idea shows promise, it will be considered for Farming Together funding to help bring your idea to fruition.

Joint Ventures - how to put them together

• We want family businesses to succeed

• We aim to identify the circumstances required for them to succeed:

– Economies of scale (or niche)

– Profitable enterprises*

– Excellent management (reporting)*

• Categories of farm expansion:

– Increase area; increase production*; improve utilisation of existing machinery/labour*.

*The key elements for a family business

• A.G.E.S. Framework

– Architecture – strong foundation

– Governance – separate business and family

– Entrepreneurship – leadership and strategy

– Stewardship – custodian for the future

Source: Family Business Australia

Know your business

• Analyse farm performance to determine options for expansion.

• How does your on-farm financial performance measure up:

• Enterprise returns

• Variable costs

• Overheads

• Benchmarking

• Land values

• Compare to off-farm investment• How do your current off-farm investments perform

• What are the alternatives

• What are the returns from the investment options

7

The importance of farm scale

Source: ABARE

High rainfall zone performance:

• Average performance is -0.1% below national average of 1% (marginal)

• Top quartile performance is 2% below national average

• Each step up in management performance adds ~2% to returns

• Each step up in scale adds ~1% to returns

• The impact of scale is relatively consistent across management quartiles

AUSTRALIA (Farm

Output)

4th

Qtl3rd

Qtl2nd

Qtl1st Qtl

All Farms

$1m+ 0% 3% 4% 8% 3%

$500k - $1m -1% 1% 4% 7% 2%

$200k -$500k

-2% 0% 2% 4% 1%

$400k -$200k

-8% -3% -1% 1% -2%

All Sizes -3% -1% 1% 3% -0.1%

Return on Assets (excl. Capital Gains)

‘High Rainfall Zone’

Source: ABARES - analysis undertaken by Mark Ashenden and Dennis Wignall using a rolling 3 year performance by quartile. NB this table shows

broadacre farms only (approx. 70% of total rural). 1990-2007 data updated with AGSURF extracts to 2014 assuming similar performance differentials for the

farmer quartiles

Management and Scale impact in Australia’s ‘High Rainfall Zone’

The bottom line = performance / productivity needs to lift before chasing scale!

• Farm land is a finite resource with high competition to own / operate

• Lessors get yields of 4% to 5%

• Successful asset managers should beat that return

• Separate operating returns from capital appreciation

• Take a long term view and set achievable targets

• Collaboration is one pathway to improve management and achieve benefits of scale without having to buy more property

AUSTRALIA (Farm Output)

4th

Qtl3rd

Qtl2nd

Qtl1st Qtl

All Farms

$1m+ 0% 3% 4% 8% 3%

$500k -$1m

-1% 1% 4% 7% 2%

$200k -$500k

-2% 0% 2% 4% 1%

$400k -$200k

-8% -3% -1% 1% -2%

All Sizes -3% -1% 1% 3% -0.1%

Return on Assets (excl Cap Gains) –

High Rainfall

Source: ABARES - analysis using a rolling 3 year performance by quartile. NB this table shows broadacre farms only (approx. 70% of total rural). 1990-2007

data updated with AGSURF extracts to 2014 assuming similar performance differentials for the farmer quartiles

Management and Scale impact - lessons

… build business skills and find ways of achieving scale benefits by operating collaboratively

Joint Ventures - how to put them together

• Why be in a joint venture:

– Limited capital

– Share risks without borrowing

– Develop economies of scale

• JV requires a different mindset/management approach

• Knowing the people involved

• Timing – booms and busts

• Choice under risk and uncertainty = losses loom larger than gains (People are twice as disappointed by a loss as they are please by a gain)

Land prices

• Figure 2 Land prices for broadacre farms, by zone, Australia, 1977–78 to 2015–16 (average per farm)

Farmland Performance

Farmland Performance - Australia

(average annual median price growth)

2016 9.3%

5 years 5.6%

10 years 3.2%

20 years 6.4%

2016 Land prices

NSW Farmland Performance

SA Farmland Performance

VIC Farmland Performance

Farm - Financial performance

Figure 1 Financial performance, all broadacre industries, Australia, 1996–97 to 2016–17 (average per farm).

Return on capital

• Figure 2 Return on capital, average all broadacre industries, Australia, 1996–97 to 2016–17 (average per farm).

Other Asset Classes

Cost of land per tonne of wheat

rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrreeeeeeeee

Main aim of a JV

• Aim – to secure economies of scale without buying/carrying long-term debt.

• Generally, larger farms generate higher rates of return as a result of increasing returns to scale, greater access to superior technologies and greater management skill (Jackson & Martin 2014).

Farm Performance and Options

• Better farm performance creates opportunities for joint ventures.

• The following information is from the recent farm performance results outlined in Holmes & Sackett’s AgInsights 2016 (Vol.19)

2016 Wheat Gross Margins

Enterprise: WheatBottom

20%Average Top 20% Average

$/ha. 20162007-2016

Income 690 928 1,112 622 Enterprise Expenses 366 410 433 329 Gross Margin $/ha. 324 518 679 293

Indicative lease price per ha.

162 259 340 147

Indicative lease price per acre

66 105 137 59

KPI'sPrice received ($ per tonne)

256 265 267 249

Yield (t/ha.) 2.7 3.5 4.2 2.5 Water Use efficency (kg/ha/mm)

11.5 13.6 14.6 11.2

Crop Area (ha.) 200 390 701 673

2016 Sheep Gross MarginsEnterprise: Dual Purpose Flock

Bottom 20%

Average Top 20% Average

$/DSE 20162007-2016

Sheep Trading (14.67) (5.13) (0.97) (2.57)Lamb Trading 41.46 42.42 50.12 32.99Wool 22.14 26.04 30.02 19.36 Total Income 48.93 63.33 79.17 49.78 Enterprise Expenses 22.31 20.21 16.73 16.71 Gross Margin $/DSE 26.62 43.12 62.44 33.07

Stocking Rate DSE/ha. 6 8 12 9Indicative lease price per ha. 80 172 375 149 Indicative lease price per acre

32 70 152 60

KPI'sLamb Price ($/head sold) 86 99 116 86 Weaning % 1 1 1 1 Wool Price ($/kg clean sold) 12 13 13 10 Mid winter stocking rate (DSE/ha.)

10 10 8 10

Labour efficency (DSE/labour unit

4,202 5,594 6,909 6,301

2016 Cattle Gross MarginsEnterprise: Beef - Beef Herds

Bottom 20%

Average Top 20% Average

$/DSE 20162007-2016

Enterprise Income 42.84 54.08 67.83 32.47

Enterprise Expenses 17.83 11.94 6.47 8.37

Gross Margin $/ha. 25.01 42.14 61.36 24.10

Stocking Rate DSE/ha. 8 9 10 9

Indicative lease price per ha. 100 190 307 108

Indicative lease price per acre 40 77 124 44

KPI's

Cost of Production ($/kg lwt) 2.70 1.67 1.11 1.45

Production kg lwt/head sold) 222 229 236 212

Labour efficency (DSE/labour unit

8,465 14,962 17,495 13,048

Enterprise Size (annual av. DSE) 6,167 10,598 7,758 10,657

The Impact of Farm Performance on JV’s

• Land is a sought after asset.

• Values are rising strongly.

• To secure JV opportunities you must be at the leading edge of farm performance.

• The best producers can pay more/offer more in a joint venture.

Lease Pricing Affordability

(50)

-

50

100

150

200

250

Enterprise:Canola

Enterprise:Wheat

Enterprise:Barley

Enterprise:GrazingWheat

Enterprise:Wool flock

Enterprise:Prime Lamb

Flock

Enterprise:Dual Purpose

Flock

Enterprise:Beef Herds

Leas

e P

rice

$/a

cre

Farm Enterprises

Lease Pricing - Affordability 2016(50% of GM)

Bottom 20%

Average

Top 20%

Average 2007-2016

Contract Farming - Cropping1,000 acre (404 ha) Australian Example - Farming Contract (625mm Rainfall)

Output Area (ha)Yield (t/ha)

$/tonne $ $

Wheat 202 4.5 250 227,250

Canola 101 1.8 500 90,900

Barley 101 4.5 220 99,990

Total Income 404 418,140

Total Variable Cost 113,423

Gross Margin (before machinery overhead and labour) 304,717

$/ha

Contractors Basic Remuneration @ $/ha 220 88,880

Overheads (agreed fixed costs - on this area only) 28,260

Total Overheads 117,140

Net Return 187,577

Farmers Basic Return @ $/ha 186 75,144

Divisible Return 112,433

Farmer 50% 56,217

Contractor 50% 56,217

Total Return $/ha $/ac

Farmer 325 132 131,361

Contractor (1,000 ha. cropped) 359 145 145,097

Cropping Example - 2016 Average

1,000 acre (404 ha) Australian Example - Farming Contract (625mm Rainfall)

Output Area (ha)Income $/ha.

$ $

Wheat 202 928 187,456

Canola 101 816 82,416

Barley 101 842 85,042

Total Income 404 354,914

Variable Costs* *$/ha

Wheat 202 410 82,820

Canola 101 509 51,409

Barley 101 385 38,885

Total Variable Cost 173,114

Gross Margin 181,800

$/ha

Contractors Basic Remuneration @ $/ha

267 107,868

Overheads (agreed fixed costs - on this area only) 26,260

Total Overheads 134,128

Net Return 47,672

Farmers Basic Return @ $/ha

200 80,800

Divisible Return (33,128)

Farmer 50% (16,564)

Contractor 50% (16,564)

Total Return $/ha $/ac

Farmer 159 64 64,236

Contractor 226 91 91,304

Cropping Example -2016 Top 20%1,000 acre (404 ha) Australian Example - CSFA (Top 20%)

Output Area (ha)Income $/ha.

$ $

Wheat 202 1,112 224,624

Canola 101 1,117 112,817

Barley 101 1,249 126,149

Total Income 404 463,590

Variable Costs* *$/ha

Wheat 202 433 87,466

Canola 101 483 48,783

Barley 101 429 43,329

Total Variable Cost 179,578

Gross Margin 284,012

$/ha

Contractors Basic Remuneration @ $/ha 267 107,868

Overheads (agreed fixed costs - on this area only) 26,260

Total Overheads 134,128

Net Return 149,884

Farmers Basic Return @ $/ha 200 80,800

Divisible Return 69,084

Farmer 50% 34,542

Contractor 50% 34,542

Total Return $/ha $/ac

Farmer 286 116 115,342

Contractor 353 143 142,410