Joint Ventures How to put them together Duncan Ashby, ProAdvice - - PowerPoint PPT Presentation

Joint Ventures

How 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-operatives

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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 farmers Your 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

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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 Qtl 3rd Qtl 2nd Qtl 1st 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

AUSTRALI A (Farm Output) 4th Qtl 3rd Qtl 2nd Qtl 1st 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

• perating 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

rrrr rrrr rrrr rrrr rrrr rrrr rrrr rrre eee eee ee

Main aim of a JV

• Aim – to secure economies of scale without

buying/carrying long-term debt.

• Generally, larger farms generate higher rates
• f 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
• pportunities 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: Wheat Bottom 20% Average Top 20% Average $/ha. 2016 2007- 2016 Income 690 928 1,112 622 Enterprise Expenses 366 410 433 329 Gross Margin $/ha. 324 518 679 293 Indicative lease price per ha. 162 259 340 147 Indicative lease price per acre 66 105 137 59 KPI's Price received ($ 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 Margins

Enterprise: Dual Purpose Flock Bottom 20% Average Top 20% Average $/DSE 2016 2007- 2016 Sheep Trading (14.67) (5.13) (0.97) (2.57) Lamb Trading 41.46 42.42 50.12 32.99 Wool 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 $/DSE 26.62 43.12 62.44 33.07 Stocking Rate DSE/ha. 6 8 12 9 Indicative lease price per ha. 80 172 375 149 Indicative lease price per acre 32 70 152 60 KPI's Lamb Price ($/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 Margins

Enterprise: Beef - Beef Herds Bottom 20% Average Top 20% Average $/DSE 2016 2007- 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: Grazing Wheat Enterprise: Wool flock Enterprise: Prime Lamb Flock Enterprise: Dual Purpose Flock Enterprise: Beef Herds Lease Price $/acre Farm Enterprises

Lease Pricing - Affordability 2016 (50% of GM)

Bottom 20% Average Top 20% Average 2007-2016

Contract Farming - Cropping

1,000 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