Boots and suits - what can corporate and family farms learn from each other?

Take home messages

• Family farms could benefit from adopting some risk management approaches from corporates.
• Family farm inter-generational intuition and flexibility can lead to timeliness that corporates could learn from.

Introduction

A recent study indicated that 83 per cent of participants preferred learning from other farmers (Wimmera Development Association 2015). What if your farmer neighbour is not from a family farm business, but is part of a corporate farm business? Is there anything you can still learn?

Alternatively, if you are a farm manager or an executive in corporate farming, what can you learn from your family farm neighbours?

This paper proposes that both types of broadacre farm businesses are not actually that different and have plenty to offer each other.

Similarities

Farm business success is driven and governed by a common set of high performance traits, regardless of ownership structure.

Farms in the top 25 per cent of financial performance return twice that of the average performers (Thompson 2015). Several studies identify common characteristics in the high-performing farm businesses and their people, which are:

• Passionate and interested in farming.
• Strong human capacity.
• Good thinkers and decision makers.
• Organised with impeccable timing.
• Technically strong.
• Intuitive and good at taking calculated risks.
• Adaptable and flexible.
• Seek advice, process that advice and act on it astutely.
• Treat the farm as a business.
• Understand profit drivers and how to manage them.
• Know when to spend, what to spend it on and when to cut back spending.
• Market grain well.
• Manage their exposure to debt responsibly.
• Have sound business relationships (Malcolm 2010, Hunt 2010, Kingwell et. al. 2013).

These golden traits are equally applicable to families and corporate farm businesses alike.

Objectives of a farming business

Regardless of ownership, the objective of a farming business is to make a return on the investment by making a profit, which requires good performance in all aspects of the business. Those who perform in the top 25 per cent focus strongly on these basic objectives and are good at managing the risk and uncertainty to achieve the ultimate aim of viable profitable business. Successful farming businesses have a long-term view.

Both farm types aim to be profitable and viable in the long term, but some other objectives may also be different.

Family farms’ objectives may include some or all of the following:

• Generating profits to sustain their family through good living standards and education.
• Growing the business to continue the legacy for generations to come.
• Preparing for retirement and life after farming.
• Being recognised as a good farmer.
• Being at the forefront of innovation and technology.
• Caring for their land resources.
• Ensuring the business is established and sustainable for future family generations.

Corporate farms are legally obligated to act in the best interests of their investors. The objectives of investors vary depending on the type of investment. They may include some or all of the following:

• An operating return of Consumer Price Index plus three to four per cent (a common benchmark for institutional investments).
• Capital growth.
• Low risk, stable return through lease-back arrangements.
• Higher risk, but higher reward by developing the asset into a higher land value use and then selling.
• Investments uncorrelated to other current investment strategies.
• Minimising business risk.

Both farm types have stakeholders

Family farm stakeholders affected by the success of the farm may include:

• The landowners.
• The children who need educating and potentially may want farm involvement.
• The spouse who expects a reasonable standard of living and a quality relationship.
• The key operational decision makers.
• Directors of companies and trusts (if structured that way).
• Non-family employees or business partners.
• Service providers.
• The community in which the farm resides (neighbours etc.).

Corporate farm stakeholders affected by the success of the farm may include:

• The investors.
• The fund manager or trustee.
• The operating company.
• Directors, employees and their families.
• Service providers.

The community in which the farm resides (neighbours etc.).

Differences

Family farm characteristics

Family farms come in all shapes and sizes. They may have some or all of the following features:

• Farm-owned and operated by family members.
• Business structures could be sole proprietor, partnership, Trust with Limited Liability Company as Trustee, or a Company (Wibberly 2014, Crowe-Howarth 2014).
• Key decision-makers living on or near the property.
• Property often located in one region or specific area.
• Operational decision-makers may or may not own the land.
• Debt funded through financial institutions.
• Multiple generations sometimes involved in the business.
• Usually highly orientated toward production and farm operations.
• Varying levels of business-like behaviours, structures and reporting standards.
• Varying levels of scale.
• Varying levels of skill and success.

Corporate farm characteristics

Corporate farms also come in all shapes and sizes and have varying levels of success. Lynch et. al. (2011) provide a comprehensive overview of broadacre corporate farm structures, which generally have some or all of the following features:

• Land ownership separated from operating business.
• Access to capital through equity funding rather than debt funding (or a combination of both).
• Company directors and executive key management operating remotely to the farm(s) location (and often city-based).
• Commercial and structured culture.
• Varying levels of skill and success.
• Usually large in scale and often in more than one geographic zone.
• Landowners may be public or private companies, private equity, institutional investors, funds managers or sovereign funds.
• Australian broadacre corporate farms were classified into the following types:
• Localised hub - one entity in one location.
• Multiple hub and spoke-multiple locations.
• Land transformation - aiming for capital gain.
• Management services - large scale management for absentee owners.
• Contract farming - large scale leasing and farming.
• Hybrid structures (Lynch et. al., 2011).

Learnings for each other

The culture of corporate governance and professionalism is a key strength of corporate farms as it creates discipline around decision-making and reporting.

Aspects of corporate governance are applicable to family farms, although this is not always recognised. Family businesses with company or trust structures may also have obligations under the relevant Corporations Act or Trustees Act.

Regardless of the actual structure and legal obligations, decision-making on some family farms could be improved by using governance discipline and considering stakeholders when making big decisions or ensuring compliance, for example:

• Capital expenditure - land, machinery and technology, infrastructure.
• Major inputs - fertiliser and chemical.
• Formalisation of policies.
• Formal communications when more than two people are involved in the business.
• Grain marketing strategy.
• Compliance with workplace health and safety, employment and environmental regulations.
• Financial monitoring and reporting.
• Succession planning.
• Risk Management.
• Long-term strategic decisions that could potentially impact future generations.

Example

Consider a partnership of two couples with 25 per cent share per person. Both couples have families with education expenses for the next 10 years and both couples wish to grow the asset base for the next generation. They have agreed that wealth creation and providing for education are the key business objectives for the next five years. The dominant partner has a passion for machinery and would preference machinery replacement ahead of wealth creation.

Using corporate farm principles, a large capital purchase decision, particularly of depreciating assets such as machinery, would consider the best interests of the business. A return on investment analysis provides evidence either for or against the use of business capital for the machinery purchase. This helps determine if the machinery purchase is in line with business objectives or if the capital is better utilised for another purpose either now or in the future.

Corporate culture has a strong emphasis on risk management

Corporate management has established processes to manage risk. These include risk identification, policies and protocols to manage the identified risks and a general acceptance that it is better to achieve a lower upside return if the risk of high losses are reduced. Family farms could benefit from stronger risk management procedures, which must be documented. Areas where documented risk management policies are beneficial include:

• Workplace health and safety.
• Business counter-party risk, especially in commodity sales.
• Commodity price risk.
• Production risk and input decision making.

Examples

1. Utilising written agreements rather than handshake deals for business matters such as land leasing or share farming, engaging contractors or employees.
2. Conducting credit checks on potential grain buyers. If the price seems too good to be true, it probably is. It is better to take the slightly lower bid and receive your money.
3. Using all available resources to determine potential production scenarios to assist in grain selling plans and crop management decisions, including cash flow and budget revisions.
4. Documenting policies.

Family farms tend to be intuitive, flexible and can respond quickly to change and this is a key strength

As discussed, good organisation and timely, intuitive and adaptive decision-making are key strengths of high-performing farm businesses (Kingwell et. al. 2013, Hunt 2010).

The small business structure of family farms allows such flexibility. The human capacity - including intimate knowledge of the region - is built up over generations of experience. The rigorous business procedures that create good corporate governance and risk management can create layers of complexity and slow down decision-making. Balancing this with the need for rapid decision-making and flexibility is challenging in a corporate setting.

The structure of the corporate farm model influences the response times for major decisions. A strong culture that empowers and trusts farm managers with appropriate delegations of authority and flat management structures reduces response times. Forward planning and scenario analysis at both the operational and management level are essential. Being able to anticipate what might be ahead allows the necessary action to occur on ground in a timely manner.

Example

An outbreak of a new disease has occurred and may require significant outlay on chemical that is in short supply.

Least desired outcome for corporate farm

The business policy requires out-of-budget expenditure to be approved by corporate management regardless of the amount. Farm staff are reluctant to spend out-of-budget due to the arduous process. No formal pre-approval or communication structures are in place to flag such an incident. The disease is monitored. Two weeks later, there is no choice but to control the disease with chemicals or face a significant yield penalty. Approval for expenditure is sought and eventually granted. Spraying occurs four weeks after the optimum time. Return on investment is questionable.

Most desired outcome for corporate farm

Farm staff hear about the problem. They flag with management in their regular communication that an unbudgeted item may be required, check chemical availability and place a tentative order. Farm management has the authority to make the decision without requiring formal approval.

Corporate management have reported the potential issue in a recent production report to the Board. When the agronomist recommends the action is required, the farm manager responds accordingly including a note to corporate management. Chemical is applied in time to achieve maximum gain. Return on investment is 5:1. Corporate management has full faith in farm staff, the business prospers with healthy returns generated for the investor. The neighbours note the good management and start to look over the fence.

Conclusion

Both family farms and corporate farms vary in their structures and their level of success. Family farms could benefit by considering risk management and decision-making approaches of the corporate culture. Corporate farms could benefit from ensuring the organisational structure does not impede the requirement to be timely and flexible. All farm businesses require technical competence, impeccable timing, rational decision-making and a focus on costs and profit.

References

Thompson, T (2015). Australian grains Financial performance of grain producing farms, 2012–13 to 2014–15. Research by the Australian Bureau of Agricultural and Resource Economics and Sciences. Research report 15. 3 June 2015.

Crowe-Howarth Pty Ltd (2014). Business structures for the family farm..

Hunt, E (2010). Improving farmer capacity to manage profitability and risk. BCG 2010 Season Research Results. Birchip Cropping Group.

Kingwell, R, Anderson, L, Islam, N, Xayavong, V, Wardell-Johnson, A. Feldman, D and Speijers, J. (2013). Broadacre farmers adapting to a changing climate. Final Report to National Climate Change Adaptation Research Facility, Gold Coast. here.

Krause, M (2014). Farming the business. Sowing for your future. Grains Research and Development Corporation, Canberra ACT.

Lynch B, Llewellyn R, Umberger W (2011). Can corporate farms provide new pathways to improve the profitability and productivity of family farms?

Malcolm, B (2010). Pursuing growth without regret in risky crop farming. Department of Agriculture, The University of Melbourne.

Wibberly, B (2014). Business structures for the family farm.

Wimmera Development Association (2015). Future education and training needs of the agriculture sector in the Wimmera. Wimmera Development Association, Horsham, Victoria.

Contact details

Kate Burke
Think Agri
0418 188 565
thinkagri@icloud.com