Early in my career, in England, I managed a portfolio of cropping farms for an investment bank. These were structured on a partnership basis with a farming company who was a joint venture partner carrying out the farming and the investment bank providing working capital and, of course, the farms themselves. Remuneration was in three parts:- firstly, a return on the bank’s working capital, secondly, payment of rent to the bank and thirdly, a 50-50 split of the remaining profit between the bank and the farming partner.
The whole thing was a disaster.
There was never much profit left to split, the farming partner complained that the farms were under capitalised in regard to drainage and buildings. The bank resented the complaints but paid for buildings and drainage which were then project managed by the farming partner. The bank was dissatisfied with the project management and so on and so forth until, you guessed it, the partnership was dissolved and the farms were sold.
As it happened this same merchant bank had a parallel portfolio of leased farms which were managed by a colleague of mine. In stark contrast to “my” portfolio, the leased estate ran like a well serviced sewing machine. Most frustrating for me!
The message to take home from this is that farming partnerships are difficult (impossible?) while leased farms are likely to run much more smoothly provided the lease drafting, tenant selection and lease administration are sound.
This brings us to the question of share farming.
The phrase “share farming” suggests a partnership between landowner and farmer. However, the situation is more complex. In my view, some share farming arrangements are effectively short-term leases producing rent and some are a form of joint venture or partnership. Let me explain.
Many share cropping arrangements provide for a percentage of gross sales to be paid to the landowner with the share farmer providing all operations as well as all inputs/variable costs (i.e. seed, fertiliser & chemicals). A usual split for this is 30% of sales to the landowner and 70% to the farmer. However, in some cases, the landowner may provide 50% of the inputs while the farmer provides the other 50% plus 100% of operations (sowing, spraying, harvesting etc). The arrangement here is usually for the landowner and the farmer each to receive 50% of the proceeds.
In the first case the farmer provides no “tenant’s capital” but only the land and is paid a percentage of turnover. The landlord’s portion will depend, in part, on the tenant’s efficiency as a farmer as well as rainfall and grain prices. However, there will be no involvement by the landowner in the cost of seed, fertilizer or chemicals. The landlord’s receipts might be termed a “turnover rent” that is a rent set according to the tenant’s sales. This system of rental assessment is adopted in many supermarket leases to major supermarket chains such as Coles and Woolworths. Here rentals are likely to around 2% of audited turnover. Nobody would describe an investor in a leased supermarket as being in partnership with Coles or Woolworths. In the same way, the landowner in a 30/70% land only share farming agreement is a rent-receiving landlord while the landowner who advances 50% of inputs is a joint venture partner. Thus we may describe a 50/50 sharefarm agreement as being a form of partnership. However, in most cases, the landowner in such an arrangement does not provide any labour into the partnership only a proportion of the variable costs/inputs (50% in this case).
By way of contrast, a true working partnership will involve the landowner(s) providing both working capital and labour. Such arrangements are much more complex and hence more fragile. Often disputes can arising regarding management strategies, hours worked, financial management and so forth. In my view, suspicion within the agricultural industry regarding partnership farming is well founded.
