An ageing farm owner population and the appeal to non-farming participants of investing in food production for a hungry world, combined with the ability to delegate management and share financing, means interest in such ventures is likely to remain. It is timely to reflect on the performance of these entities and think again about the issues and opportunities about this ownership structure.
The most pressing weakness has been the limited cash return generated by some joint venture operations. This partly reflects the traditional disconnect between farming asset values and the returns they generate. This can be accentuated by insufficient shareholder equity combined with volatile product prices. My perception is that equity partnerships work best if their debt levels are kept lower than what would otherwise be acceptable for a privately owned operation.
This trend for modest cash surpluses can be compounded by lack of alignment of shareholder expectations and goals. This highlights the importance of careful evaluation of the motivations of investors before these operations are established.
Equity partnership shareholders commonly comprise a mix of owners of existing farming operations and non-farming participants. The latter group will most likely have strong cashflows from other business or careers so they will be satisfied with profits accumulating for debt reduction or reinvestment in the business. Contrasting with this, those who already have farming enterprises are more likely to be looking for distribution of profits.
This tension between equity growth and cash returns can be complicated by bankers' requirements for debt reduction. This combination can make it difficult to achieve consensus on strategic direction and profit distribution. This demonstrates the benefit of lower debt levels and stronger cash flows so there are options to release cash surpluses and respond to differing shareholder aspirations.
I have noted some situations where individual investors' bankers have excluded the contribution of the assets and security value of shares in equity partnerships when calculating their clients' security positions. It is understandable that the more complicated saleability of shareholdings in such an enterprise will be seen as a less "liquid" security asset from their point of view.
Those who have leveraged against sound equity in their home operation can potentially be penalised for the additional debt they incurred to fund that investment.
Of greatest concern is that the execution of a decision to exit from these investments can be less than straightforward. The usual requirement to offer shares to existing shareholders before putting them on the open market can mean that the sales process is time consuming and complex. If there are a number of shareholders involved, getting consensus and cooperation on entry and exit can be challenging. This can result in a sense of being held captive by the investment. It appears much easier to get into than out of syndicated farming operations.
In the early days of developing equity partnerships there was extensive discussion about including "sunset clauses" in shareholder agreements. These require a business to be sold unless all parties agree to continue with the venture. This means there is a defined timeframe for business sale in the absence of a unanimous decision to continue trading. It offers those wishing to exit greater certainty regarding their ability to sell at market values although this will always be driven by economic conditions prevailing at the time of sale.
Finally, the spirit and culture of corporate farming ventures is slightly different from the traditional family farming operation. Family corporates are typically influenced by broader personal, business and career objectives of the owners. Equity partnerships impress as having a narrower focus driven predominantly by a commercial expectation of profits and capital growth.
There is no doubt aggregation of farming businesses and the need to rationalise businesses owned by an ageing farm owner population will continue to drive the development of ventures with shared ownership. Judging by the sentiment I have picked up in corporate farming to date, this option still has some way to go before it fully delivers the expectations of all stakeholders.
• Kerry Ryan is a Tauranga agribusiness consultant. Contact him at www.kerryryan.co.nz
