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Alliances and Partnerships

Related sites:  www.machinerylink.com

Machinery Alliances:  Are they right for you?

By Willie Huot, Extension Agent, Grand Forks County

What are they?  Alliances or partnerships are nothing new to agricultural producers or the industry.  Farmers have been working together in various capacities for decades.

The threshing crews and cattle roundups of the past are examples of how producers worked together to accomplish tasks that would have been difficult or impossible to accomplish alone.  Early partnerships often developed to increase the labor supply needed to farm with less mechanized equipment.

As agriculture has evolved, the types of partnerships have also changed.  Increased size and technological advancement of equipment has greatly reduced the labor needed to carry out most types of farming and ranching.  This modernization has required large capital investments by producers.  In recent years, the capital required to replace and update equipment has been the primary reason for developing partnerships between producers.

Who forms machinery alliances?  There is no producer of a certain commodity who can be identified as one most likely to be involved in these types of arrangements.  Examples of these partnerships can be found for operators producing most any type of crop or livestock.

The most distinguishing feature of these producers is their attitude or openness to a new way of thinking about machinery and equipment ownership.  They are willing to give up some freedom of total ownership and control of equipment for a financial gain shared by all partners.  These individuals have a good knowledge of their equpment cost per unit of productionand make ownership decisions based, in large part, on financial outcome for their operations.  In the past these partners have been primarily family members or neighbors living near each other.  However, as farmers become more mobile in their travels and communication via the Internet becomes more commonplace on farm operations, it is becoming easier to identify potential partners that are located much further apart.

Regardless of the geographical distance between partners, the most important factor in making such partnershps successful is the careful selection process to find partners who are compatible and can alter their decision making and work schedules to benefit from a partnership.

Sharing equipment with others who have different time schedules for usage, such as planting, controlling pests, and harvesting, will reduce the conflicts that are likely to arise for scheduling equipment usage.

These relations are sensitive and are sometimes compared to a marriage by those who develop them.  Like marriages, they may fail, but when they succceed, all parties are usually better off financially than the individual owners in regards to the shared equipment.  It is a way for smaller farmers to become more competitive by reducing their overall costs and to have access to the latest technology.

Equipment examples that may be considered for joint ownership.  Virtually any piece of equipment can be considered for joint ownership.  The pieces most suited for joint ownershp will vary for each situation.  Pieces that have occasional use such as rock pickers, scrapers, stalk shredders, dozers, and backhoes can be easily shared between owners.

Seasonally used equipment such as that used for tillage, applying fertilizer, planting, pest control, and harvesting can also be jointly owned.  Having a workable plan for scheduling these pieces is very important.  Equipment used throughout the entire year or growing season, namely, tractors, can also be owned jointly, but scheduling use is more difficult.

Find appropriate partners.  In many cases, the partners are relatives, neighbors or someone in the near proximity.  This makes the logistics of joint ownership easier because of the reduced transportation costs between parties.  Further, it is likely that the parties are familiar with each other and already have a basic knowledge of each others operations.  A major difficulty may be the similarity of operations.  Producers raising the same crops in the same geographical area are likely to have trouble scheduling the use of some equipment.  Conversely, there will be fewer conflicts with scheduling if partners raise at least some crops that are different.

Being open minded and willing to listen to the other person's point of view is very important in beng good partners.  Revealing to each other sufficient information about each partner's business is vital in helping to determine if the joint venture will be a sound financial investment for all partners.  This is often referred to as "Due diligence".  Without adequate disclosure to all partners, the financial risks associated with such a venture can undermine its potential success.

The ownership structure.  There is no "one fits all" method for these ventuers.  By far, the most common acquisition alternative is sole ownership where one individual has all the purchase and operational cost of the equipment.  He or she may opt to do some custom work with the equipment as a source of additional revenue.

Joint ownership is gaining popularity for large pieces of equipment that can be shared between parties.  In most cases, initial purchase costs are shared equally between parties and operational costs, including repairs, are shared proportionally by amount of usage.  In some cases an operator is hired to run the equipment for all owners.  Each owner than pays on a per hour or per acre basis for the operational expenses.  The advantage of this is the efficiency of usage between owners.  It can also provide additional "labor" during peak season like planting and harvesting.

Any type of ownership must be predicated on a trusting relationship between parties.  It requires planning to ensure that the equipment is scheduled so its use is available to all parties in a time frame that helps assure the most beneficial use possible for owners.

Formalizing the agreement.  The documents that spell out these agreements vary greatly in complexity.  Some are done only verbaly and modifications are made as needed.  These can be sufficient if the trust levels between parties is high and no major disruption of plans occur.

The most preferred method of developing this type of partnership is with a written agreement betwee the parties.  It need not be complex but should clarify several issues.  These include purchase arrangements, operational costs, scheduling its use, repairs, storage, replacement terms and liquidation.  These will vary with each piece of equpiment.

However, discussing these issues ahead of the actual joint purchases and agreeing on how to handle each issue for each piece of equipment will save time, money and stress in most cases.  For such an arrangement to work, it must be financially beneficial to each party involved.

Sources of information.  Little research regarding machinery alliances exists.  Most information available comes from producers who have actually formed alliances.  Many of them have told their stories in various farm magazines.  Here are some articles that provide some information on this topic.

Partners for Profit, Farm Journal, November 1998
Safety in Numbers, Farm Journal, December 1998
Partners Team Up for Opportunity,  Farm Journal, January 1999
From the Ranks, Top Producer, February 1999

Other resources:
Thinking Globally - Farming Globally
David & Jennifer Saxowsky
Department of Agricultural Economics
North Dakota State University
Fargo, ND

 

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