Farm SyndicationsAdd RSS Feed What is RSS?

Nov 2006

Trends are, not surprisingly, generally a result of their times. Farm Syndication is no exception, with currently a heavy involvement in and demand for the same.

Noteworthy is this quote from the Fonterra’s Shareholder’s Council Media Statement of 17 December 2004 on “Industry Survey provides focus for the future”:

“Of particular concern to the Council are the challenges our sharemilkers say they are now facing in moving up the traditional path to farm ownership….and many sharemilkers are looking at other ways of growing their dairy interests.  We can expect to see more equity partnerships in the future along with the development of improved farming practices and new technology.” (bold italics are the author’s)

So, why are we seeing this increasing interest?  We would suggest:

  • rapid inflation in land and stock values;
  • economies of scale and rationalisation of resources;
  • diversification;
  • opportunity to use new off farm capital;
  • ability to utilise increase in stock, land and share values;
  • share in success of farming in New Zealand.

The use of such syndications is reflected in the fact that currently there are now 8,000 owners among Fonterra’s 12,500 suppliers.  With amalgamations, the number of suppliers is reducing at 400 –500 per year.

Because of the decreasing number of sharemilking positions, sharemilking can appear risky for both the sharemilker and the farmer (sharemilkers worry that there might not be positions for them, and conversely, owners worry that there may not be able to locate and contract sharemilkers).

Against this background farm syndications or equity partnerships are flourishing.  They bring the ability to utilise experience, youth, vitality, on, and off farm capital and economies of scale.  They are not restricted to dairying being common in forestry, prevalent in viticulture and horticulture and also evident in sheep and beef.  The size of a dairy investment (often in excess of $3m for an average property) and the returns experienced (13.7% compounded 1990–2003) contribute to the attraction of syndications.

Many North Island farmers have ventured into the South Island in such syndications.  Partnerships and companies are the most common vehicles used by the investing parties.  Often, syndicates (particularly larger syndicates), are organised by an experienced professional syndicate organiser (that does not itself take an equity interest).  That professional organiser will frequently take an ongoing management role and this can prove particularly useful. It can be difficult for the syndicate members from a distance to adequately oversee such matters as staffing and resourcing.  Professional organisers also seem to attract and have a ready list of potential investors and likely properties.  This can within the company syndicate structure facilitate the exit from the syndicate for any syndicate members who may not wish to continue.  However this is not guaranteed and such investments should be seen as longer term.

Syndicate members, especially off farm, also need to be mindful that as with any business venture, farming has its risks, including:

  • vagaries of nature;
  • commodity price fluctuations and exchange rate movements;
  • dependence on Fonterra efficiencies;
  • staff recruitment, retention and management;
  • liquidity, such interests may not be readily saleable and are longer term

In our experience, a diversity of investors, including some with relevant farming experience, can prove successful when the expectations and obligations are established and agreed from the outset.

Questions that need to be asked, and, where appropriate professional advice taken, include:

  • who are the people you are investing with?
  • how do you know the property and stock are appropriate for your intended mode of farming?
  • has the appropriate independent advice been taken, including legal, accounting, and agricultural?
  • how will the project be managed?
  • what provision has been made for the protection of key persons?
  • what arrangements are there for ongoing communication and reporting?
  • what assessment has been made of the security of the investment?
  • what is the business plan?
  • what is the dividend or reinvestment plan?
  • on what basis can major matters affecting the syndicate be changed?
  • how will the syndicate be governed?
  • what is the term of the investment, and what ability is there to exit and on what terms?
  • what are the contractual terms between syndicate members?
  • what provisions are there for dispute resolution?

Farm syndications or equity partnerships can provide a means to farm ownership that otherwise does not exist.  An equity owner who has had relevant experience as a sharemilker may also have the opportunity to manage or lower order (percentage of milk cheque) share milk the same property in which they have a vested interest.  What is certain is that arrangements of this kind now provide a necessary alternative and are becoming increasingly available and availed of.