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Farm syndication - a continuing trend

Working from the old adage 'together we achieve more', farm syndication in New Zealand is now very much a part of our rural economy.
The growth in farm syndication has come from the likes of :

  • sharemilkers looking at different ways to grow their dairy interests

  • professionally managed farming syndicates marketed to the public including existing farmers and new investors

  • smaller groups of individuals sharing their resources to provide rationalisation of assets, skills and economies of scale

As at 2005 Fonterra had 12,500 suppliers made up of 8,000 owners. There are now 10,463 suppliers (a decrease of 400-500 per year) and supposedly still 8,000 owners.

In the same period, production has increased by 86m litres – received from fewer suppliers made up of more owners proportionately. There should be plenty of available candidates for the Fonterra Governance Development Programme.

Syndication has been common in forestry for some time but, over the last few years, there has been a noticeable growth particularly in the dairy industry, and to a lesser degree, sheep and beef. The latter now looks to be changing to a marked degree with the increase in profitability.

Managed farm syndicates are now part of the investment landscape and provide a useful facility to existing farmers seeking to diversify and contribute their skills and experience. New non-farming investors are also attracted by the opportunities presented.

Whilst these managed syndicates are generally professionally managed, documented, and presented, the more usual "closely held" syndicates seem to be more hit and miss. This is understandable given the range of issues to be addressed in setting up a farming syndicate, usually in a constrained period, including:

    • Who and on what basis is someone promoting the syndication?

    • What preconditions need to be fulfilled?

    • Are all parties involved solvent, untainted and compatible?

    • What due diligence is necessary?

    • Who will run the operation and what authorities are they to be given?

    • Are there any Securities Act or Overseas Investment issues to be addressed?

    • Which advisors are to provide the necessary independent advice to the parties involved?

    • What entity is best suited to the operation?

    • What documentation and agreements need to be in place before anything can be made "unconditional"?

    • What is the intended term of the investment and what exit strategies are to be available?

This list is far from comprehensive – the initial questionnaire we work through with clients goes to 6 pages!

When it comes to advisors, there can be issues when you use one of the parties’ existing advisors. In the event of a future dispute between the parties and/or the entity they could be easily conflicted and not able to act any further. It is against this background that we regularly receive inquiries or instructions from parties for whom we have not acted before, to advise, act for, and form their syndicate.

All of the major banks have Equity Farm Managers who have seen what can go wrong with these syndicates. More often than not it is because the process and documentation have not been satisfactorily completed (to ensure the respective issues are addressed). This heightens the chance the syndicate does not go the distance. I have been contacted by several bank officers in relation to syndicates which have been causing them concern because of the incomplete documentation - which we have then proceeded to complete for the parties on an impartial basis.

It is noteworthy that the smaller the number of investors often the more issues there are. This is understandable when some parties can be wearing up to three hats – shareholder, director and manager/employee. This also brings into consideration relevant issues such as death, disability, and insurance.

We often hear the saying "the devil is in the detail" – farm syndications are no exception. There is no substitute for good preparation, a clear process, full understanding, and commitment.

For a “Joint Venture Checklist” email brett.gould@gibsonsheat.com, or give him a call:

P: +64 6 370 6475 M: +64 27 442 7436