This article originally appeared on Grainews.com April 13th, 2021
This farm operating structure could work for farmers looking to lower costs, retiring corporate landowners or extended family farms
Mike Babcock, the new coach of the University of Saskatchewan Huskies men’s hockey team, has options about how to structure his team to win. The system or style the team plays is a function of the resources at the coaches’ and managers’ disposal. Financial resources along with the evaluation of personnel lead to the right strategy for the upcoming season.
Some farms also have options with how to structure their operation for success. Financial and human capital can be leveraged to maximize skill sets, create efficiencies and optimize tax planning. Joint ventures are one such farm operating structure that may help you achieve your business goals.
What is a joint venture?
A joint venture is a business arrangement between two or more parties. While similar to a partnership, a joint venture does not own assets, is a temporary arrangement and potentially less costly to enter and exit. In simple terms, a joint venture is a bank account and a legal agreement.
The extended family farm
Many of today’s family farms are growing — in both acres and family members. With increasing costs, it’s more expensive every year to branch out and start your own operation. As well, technology advancements make the industry increasingly more specialized. It’s not uncommon to see farm families sell grain separately while pooling resources such as labour and equipment. Typically, participants are compensated based on their land, regardless of the amount of labour and machinery contributed.
While this creates skin in the game and solves the problem of how everyone gets compensated, inefficiencies still occur — notably that family members are competing against one another. A joint venture structure allows the extended family farm to manage the land, inputs, inventory and marketing as one operation, while allowing individuals to retain individual ownership of assets such as land.
The active farmer
Increasingly, more farmers own land in corporations. As well, three-quarters of farms are expected to transition in the next 10 years. This corporate-owned land could be sold or rented out, but both options may be problematic. To access the lifetime capital gains exemption, the entire farm corporation needs to be sold since only the farm corporation shares are eligible. In Saskatchewan, if the farmland is rented, the corporate tax rate on the rental income would be 51 per cent initially and could be reduced to 20 per cent with dividends paid.
A third option is to transition into a joint venture structure and share in the risk and reward of profit. This should allow access to the small business tax limit, which is currently 11 per cent in Saskatchewan.
The lowest-cost producer
Airplanes, like farm machinery, cost money when they are grounded. Joint ventures between airlines are now common. With joint venture agreements, airlines are indifferent to whose flight gets chosen. This is similar to the indifference in a farming joint venture over whose land gets farmed next.
If conventional grain farmers are selling bulk commodities to the same buyers, the lowest-cost producer will be the most profitable. If you are not a low-cost producer, superior production or grain marketing skills are needed to be competitive. Given the need to spend on inputs to maximize the gross margin and limited control over the local land market, labour and machinery costs could be an area to lower costs through a farming joint venture.
The extended family farm, retiring corporate landowners and farmers looking to lower costs may be further interested in investigating a joint venture operating structure.
Contact your trusted Stark & Marsh Advisor or an office close to you today.