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 3

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 7

The importance of farm scale Source: ABARE

Management and Scale impact in Australia’s ‘High Rainfall Zone’ Return on Assets (excl. Capital Gains) ‘High Rainfall Zone’ High rainfall zone performance: • Average performance is -0.1% below AUSTRALIA 4 th 3 rd 2 nd All 1 st Qtl national average of 1% (marginal) (Farm Qtl Qtl Qtl Farms Output) • Top quartile performance is 2% below $1m+ 0% 3% 4% 8% 3% national average $500k - $1m -1% 1% 4% 7% 2% • Each step up in management $200k - -2% 0% 2% 4% 1% performance adds ~2% to returns $500k $400k - • Each step up in scale adds ~1% to returns -8% -3% -1% 1% -2% $200k • The impact of scale is relatively All Sizes -3% -1% 1% 3% -0.1% consistent across management quartiles The bottom line = performance / productivity needs to lift before chasing scale! 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 - lessons • Farm land is a finite resource with high Return on Assets (excl Cap Gains) – competition to own / operate High Rainfall • Lessors get yields of 4% to 5% • Successful asset managers should beat AUSTRALI 4 th 3 rd 2 nd All 1 st Qtl A (Farm that return Qtl Qtl Qtl Farms Output) • Separate operating returns from capital $1m+ 0% 3% 4% 8% 3% appreciation $500k - -1% 1% 4% 7% 2% $1m • Take a long term view and set achievable $200k - targets -2% 0% 2% 4% 1% $500k • Collaboration is one pathway to improve $400k - -8% -3% -1% 1% -2% $200k management and achieve benefits of All Sizes -3% -1% 1% 3% -0.1% scale without having to buy more property … build business skills and find ways of achieving scale benefits by operating collaboratively 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

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 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 Bottom Enterprise: Wheat Average Top 20% Average 20% 2007- $/ha. 2016 2016 Income 690 928 1,112 622 Enterprise Expenses 366 410 433 329 Gross Margin $/ha. 324 518 679 293 Indicative lease price per 162 259 340 147 ha. Indicative lease price per 66 105 137 59 acre KPI's Price received ($ per 256 265 267 249 tonne) Yield (t/ha.) 2.7 3.5 4.2 2.5 Water Use efficency 11.5 13.6 14.6 11.2 (kg/ha/mm) Crop Area (ha.) 200 390 701 673

2016 Sheep Gross Margins Enterprise: Dual Purpose Bottom Average Top 20% Average Flock 20% 2007- $/DSE 2016 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 $/DSE 26.62 43.12 62.44 33.07 Stocking Rate DSE/ha. 6 8 12 9 Indicative lease price per ha. 80 172 375 149 Indicative lease price per 32 70 152 60 acre KPI's Lamb Price ($/head sold) 86 99 116 86 Weaning % 1 1 1 1 Wool Price ($/kg clean sold) 12 13 13 10 Mid winter stocking rate 10 10 8 10 (DSE/ha.) Labour efficency 4,202 5,594 6,909 6,301 (DSE/labour unit

2016 Cattle Gross Margins Bottom Enterprise: Beef - Beef Herds Average Top 20% Average 20% 2007- $/DSE 2016 2016 42.84 54.08 67.83 32.47 Enterprise Income 17.83 11.94 6.47 8.37 Enterprise Expenses 25.01 42.14 61.36 24.10 Gross Margin $/ha. Stocking Rate DSE/ha. 8 9 10 9 100 190 307 108 Indicative lease price per ha. 40 77 124 44 Indicative lease price per acre KPI's 2.70 1.67 1.11 1.45 Cost of Production ($/kg lwt) 222 229 236 212 Production kg lwt/head sold) Labour efficency (DSE/labour 8,465 14,962 17,495 13,048 unit 6,167 10,598 7,758 10,657 Enterprise Size (annual av. DSE)

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 Lease Pricing - Affordability 2016 (50% of GM) 250 200 150 Lease Price $/acre Bottom 20% Average 100 Top 20% Average 2007-2016 50 - Enterprise: Enterprise: Enterprise: Enterprise: Enterprise: Enterprise: Enterprise: Enterprise: Canola Wheat Barley Grazing Wool flock Prime Lamb Dual Purpose Beef Herds Wheat Flock Flock (50) Farm Enterprises