By the Numbers

By Danny Klinefelter
DTN Farm Business Adviser

In today's agricultural economic environment, volatile returns, narrow margins, wide variances in management ability and focus on cost reduction in commodity markets mean farmers don't have the luxury of being behind the curve. For some, survival may mean joining forces with neighbors. That may mean new relationships as business partners or in sharing resources, such as farm equipment or even personnel. Some growers are even forming buying groups or hiring joint grain merchandisers.

Collaborative farming provides an alternative for both average-sized, as well as larger farms, to become and remain more competitive. I have seen several farmers turn to successful collaborative farming arrangements as a way to cope with and succeed in an industry that is rapidly consolidating as global competition, technology and regulatory compliance are ramping up at exponential rates.

Rowley, Iowa, farmer Chris Barron launched such a collaborative arrangement a few years ago. It was a way for older solo operators without heirs to have someone "watching their back" in case of illness or inevitable aging. They also benefited by surrounding themselves with younger, more tech-savvy operators.

These arrangements are one way to maintain individual ownership of your land and still achieve:

-- Economies of scale

-- Management and technical specialization

-- Access to captive-supply-chain markets

-- Ability to economically employ the best technology

-- Improve asset utilization

I've written about collaborative arrangements before but the extreme financial pressures some farmers are experiencing or see coming are making more producers look into them more seriously. Let's just hope they haven't faced reality too late.

There's an old saying that most people change because they feel the heat rather than because they see the light. In addition to the bullet points listed above, a little further explanation of six advantages are listed below.

(1) To allow people to do what they do best: operating technical equipment, equipment maintenance, managing livestock versus crops, agronomy, accounting and financial planning/analysis, marketing, purchasing, selling and building relationships, managing people, etc. Like any successful team, by capitalizing on strengths and compensating for weaknesses, the whole can be greater than the sum of its parts and people are happier and more motivated doing work that uses their talents and lets them focus more on what they enjoy doing.

(2) Retiring farmers or those near-retirement who don't have a successor can see their business continue. Many farmers, as they near retirement don't want to quit, they just want to cut back so they can work seasonally or fewer hours. This can also provide the principal operators access to an experienced, skilled and responsible work force. A retiring farmer can also minimize the tax consequences of liquidating assets. In many cases, farmers who have older, too small or technologically dated equipment can trade for fewer pieces of larger, more up-to-date equipment that the collaborative enterprise needs and then lease them to the operating entity or use an installment sales contract rather than selling out.

(3) Combining smaller and medium-sized operations also allows for economies of scale in purchasing or marketing in larger quantities. It can also allow the operation to fully use equipment that is sized to the scale of the business. Many smaller farms either don't fully use the equipment they have or can't justify the cost of more efficient or more up-to-date technology.

(4) If the skill set needed for some jobs doesn't exist among the parties involved, a larger operating entity may be able to afford to hire and fully use an employee with the expertise needed.

(5) A collaborative operating unit can also be organized in a way that permits fractional ownership where the parties can earn a return on their labor, management and invested capital relative to the extent it is used. It is usually less expensive for younger people to buy into an equity interest in a separate operating entity than it would be to buy into an operation that includes land among the assets.

(6) Another advantage is the opportunity to bring together the different points of view and experiences of people who have run their own operations. Most collaborative operations have regular meetings of the collaborators to discuss current status versus plans and to get everyone's input on major decisions. Obviously, someone has to have the final say on major decisions or a policy basing decisions on a majority or specified super majority vote needs to be adopted before the collaborative arrangements is consummated. Votes may be based upon one person/one vote, or be weighted based on ownership percentage. There also needs to be essentially a buy-sell agreement, which specifies the terms of exiting the arrangement.

Texas A&M AgriLife Extension will conduct a first-ever National Collaborative Farming Conference in Nashville, Tennessee, on June 14-15, 2016, at the Inn at Opryland. This conference will be a little different than most Extension conferences. Nearly all of the faculty will be farmers who have actually been involved in the ventures, including Barron. But we'll also tap the expertise of CPAs, lawyers, lenders and financial consultants to find out what's worked and what can go astray when melding independent operators into joint operations.

The registration fee is $600 per participant and the hotel rate is $159 (single or double occupancy) per night. Space is limited to 120 participants so you are encouraged to register and make hotel reservations as soon as possible. The hotel block expires May 16.

Hotel reservations may be made by calling (855) 584-3466 and mentioning "The Texas Extension Education Foundation" room block. To register for the conference, contact Connie Moore at (979) 845-1772 or email connie_moore@tamu.edu.

Remember, everyone, no matter how smart or experienced, exists in four states of knowledge:

-- What they know they know

-- What they know they don't know

-- What they don't know they don't know

-- What they think they know that just isn't so

Douglas Adams quoted in the "Breakthrough Company" said, "Human beings, who are almost unique in having the ability to learn from the experiences of others, are also remarkable for their apparent disinclination to do so." If you feel you could benefit from the synergy of partnering with other farmers, join me in Nashville.

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Editor's note: Danny Klinefelter is an agricultural finance professor and economist with Texas AgriLIFE Extension and Texas A&M University. He also is the founder of the mid-career Texas A&M management course for executive farmers called TEPAP. Access his recent DTN columns at https://www.dtnpf.com/….

(MZT/SK/CZ)

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