Equity partnership
9 min read
Equity partnerships in the dairy industry offer different opportunities for joint business ventures. The page details three main types of equity partnerships: one in herd owning sharemilking business, another that owns the farmland, and a third in a farm trading company. Each type offers different structures and roles for the partners, whether it's pooling capital, sharing ownership of key assets, or dividing the business into separate entities. By exploring these options, you can determine what suits your skills and investment preferences best in the dairy industry.
Looking for different career options? Below is a summary of the equity partnership roles in the dairy industry, including pros and cons. Investigate the different farm business types and consider what would work best for you.
An equity partnership is a joint business venture between two or more individuals who have come together to pool their capital and often their skills to enable the partners to obtain revenue and growth from their farm investment.
In our overview of these operating structures, we have assumed that milk company shares and hence dividends ownership and payment are agreed upon by the parties involved.
The actual business structure of the partnership will vary. It utilises sharing of skills and investment to gain a greater return than each party could achieve alone.
Advantages
Considerations
Keys to success
Financial returns
The returns from an equity partnership would reflect any standard owner-operator model divided between shareholders (e.g. 20% of profit plus 20% of capital growth).
Typically, the key driver of the business is profitability leading to greater return on investment. Return on investment can vary significantly depending on the farm management ability, timing of entry and exit, quality and value of the land asset purchased.
The average return on total assets over the 10-year period from 2005-2015 was 7.1%. However, returns vary significantly from year-to-year as shown in the graph below.
Entry and exit
Equity partnerships can be difficult to exit if the process is not clearly defined.
They should be set up with a clear timeframe, e.g. 3 years/5 years/10 years etc. At the end of the agreement the parties can decide whether to extend the agreement or exit and how this should happen.
A policy for valuation of the business at the start and end of the agreement should be included.
An equity partnership that owns a herd and enters a herd-owning sharemilking agreement (HOSM).
Two or more parties enter a HOSM business in partnership. Generally, one of these parties will be running the day-to-day aspects of the business.
It could be that the farm owner is also an investor in the herd owning sharemilker business. In this situation, the cows may remain on the farm and the incoming ‘sharemilker’ purchases a shareholding in the EP HOSM business, and at the end of the agreement sells their share in the business to the next incoming ‘sharemilker’ or back to the farm owner.
Advantages
Sharemilker
Other equity partner/s
Considerations
Sharemilker
Other equity partner/s
Keys to success
Financial returns
The key drivers for the herd owning sharemilking business is profitability.
The equity required varies dependent on the size of the sharemilking business and cow values which can vary significantly from year to year.
Average returns of a herd owning sharemilking business are around 15% return on asset, although the range can be significant due to the large fluctuations in cow values.
For a more detailed financial example see the factsheet.
Entry and exit
Entry and exit is relatively easy compared to other equity partnership agreements that involve the land.
Equity partnership that owns the farmland. In some cases, this entity will also own other key assets such as the herd, machinery, and dairy company shares.
The business is valued and shareholdings in the land/business purchased at the agreed rate. Typically, the progressing farmer would also operate the farm as a variable order sharemilker, contract milker, or a manager as well as being an investor in the farm.
Advantages
Considerations
Keys to success
Financial returns
The returns from an equity partnership would reflect any standard owner operator model divided between shareholders (e.g. 20% of profit plus 20% of capital growth) if assets included land, herd, machinery, plant, buildings, and shares.
If the equity partnership is for land only, then the returns may be similar to lease agreements with shareholders receiving a share of the lease rental.
Return on investment can vary significantly depending on the farm management ability, timing of entry and exit, quality and value of the land asset purchased.
Entry and exit
Clear business timeframe with the entry and exit process specifically outlined: this should include the exit process if one party needs to exit before the end of the timeframe.
A clear policy around the valuation of the business at the start and end of the agreement.
An equity partnership, where the land owning and the farm trading business entities are separated.
The farm business is structured into two entities, hypothetically called Land Co and Trade Co:
Typically the progressing farmer in the Trade Co EP would operate the farm as a variable order sharemilker, contract milker, or a manager as well as being an investor in the farm.
Land Co would typically lease the land assets to the Trade Co.
There may also exist an opportunity for the farm/operating manager to purchase a stake in Land Co. This would be a separate business arrangement and could continue even if the progressing farmer leaves the farm.
This model has been successfully used in farm succession plans. In some instances, the agreement is structured once Trade Co is 100% owned by the progressing farmer, they agree to progressively purchase shares in Land Co.
Advantages
Progressing farmer
Farm owner
Considerations
Keys to success
Financial returns
Trade Co.
The returns to Trade Co will be influenced strongly by the agreed rental. In areas with high land values, calculating the lease rate using productive potential may be more appropriate to ensure Trade Co remains a viable business.
Trade Co can be expected to offer returns similar to, although slightly lower than, a HOSM business in an average milk price year (10% - 15%). This is due to the proportionally large investment in lower yielding dairy company shares (if required) compared to that of a traditional HOSM where the farm owner would retain the dairy company shares.
Land Co.
The financial returns for the Land Co. are driven by the lease rate and any capital gain.
Financial returns are dependent on the lease rate negotiated. A simple return such as 4% of land value can be used to set the lease
i.e. 4% of $45,000/ha = $1,800/ha
Alternatively, the lease is decided from the productive potential of the land
i.e. 1100 kgMS produced x $5.50/kgMS milk price x 23% share of milk income = $1,392/ha (3.1% return)
For a more detailed example of equity and returns for this type of Equity Partnership see the factsheet.
Entry and exit
The ability to invest in Trade Co will involve more modest sums, and the entry and exit into this arrangement with a clear contract agreement should be no more difficult than a conventional HOSM agreement.
Any investment in Land Co is likely a more significant investment and will be less liquid. It is possible that this arrangement could be conducted outside an investment in Trade Co and a progressing farmer may be able to leave an investment in Land Co ongoing or until such time as another suitable investor is found.