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Partner for labor

Creating a strategic alliance is becoming a popular alternative to hiring workers to secure labor on farms. Here's what you need to know to form one.

Dale Swanstrom was having a hard time securing labor on his farm. "I tried a hired man in the past. It didn't work," says Swanstrom who farms 800 acres and runs a 170-sow operation in Beresford, SD.

So in 1995, Swanstrom, 42, tried a different approach from the conventional employer-employee relationship. He offered John Bovill, a neighbor 15 years his junior, a partnership in his hog operation.

"He swaps labor for use of my machinery, buildings and facilities," Swanstrom says. New view on labor. Swanstrom is part of a growing segment of farmers who are replacing help-wanted ads with business contracts to secure labor on their farms. These farmers usually are between the ages of 35 and 55. They want to expand their business but lack the manpower to handle the additional acres or animals.

What's more, unlike the generation before them, their sons or daughters may not be interested in joining in the business. As a result, they explore an alliance with a young person outside the immediate family.

"It is hard to find good people, especially someone who wants to become an operator," says Dr. William Edwards, extension farm management specialist with Iowa State University. "So this is a good way to attract them into it. Psychologically, it carries a higher prestige than working for a wage because they are becoming part of the management."

It takes two. Partnering with another person can do more than provide labor. These young recruits may also be more motivated than traditional wageworkers because they have a stake in the business. "When you own half a baby pig, you are going to take better care of all the litter," Swanstrom says.

The pairing also can make the entire business more efficient. For example, Swanstrom has been able to double his sow herd now that he has Bovill's help. And each sow is now producing more pigs because of the better care.

A less tangible benefit is that these arrangements give established farmers the chance to give something back to agriculture. "Farmers have the obligation to bring up another generation of farmers for the industry to survive," Swanstrom says. "Helping a young person begin farming is a reward in itself."

Is it for you? There are a variety of legal entities you can form to bring a new person into your operation. These include enterprise partnership, limited liability partnership, general partnership, S corporation, limited liability company and a limited liability corporation.

All fall under the category of a "strategic alliance," according to Mike Fassler, attorney and vice president of Salisbury Management Services in Eaton Rapids, MI. "It is a union between two people who have a common interest," Fassler says. "In this case, the producer has an interest in labor and the other person has an interest in building equity."

Whether such an alliance makes sense for you is basically a question of economics, Fassler says. If labor is limited and impeding your ability to access a market, to grow or to operate economically, then you may be better off economically to form one. Another indicator is if you are underutilizing your capital-intensive resources like equipment, buildings or land.

However, even if you fit those cases, it doesn't guarantee the alliance will be economically feasible, Fassler warns. The alliance needs to generate enough revenue to support two families. The only way you can find out if it will do that is by doing a thorough financial analysis of your business. You may find that you need to reinvest or expand your business to get the arrangement started.

There are resources that can help you make those determinations. The National Farm Transition Network, coordinated through Iowa State University's Beginning Farmer Center, consists of farm transition programs throughout the Midwest that help link beginning and established farmers.

To find the program nearest you, call Iowa State's Beginning Farmer Center at 800/447-1985. Or, if you have access to the Internet, the National Farm Transition Network's Web site ( bfc/national/homepage.htm) has a listing of programs in each state.

Size up your prospects. The next step is to find the right person. Most farm transition programs keep a database of candidates that you can review.

Once you find several that interest you, the program can help arrange an interview. The interview should cover all of the questions you normally would ask when considering someone for a job, says John Baker, an attorney and administrator of Iowa's Beginning Farmer Center. These include:

Experience/education: What knowledge and skills can the candidate bring to the business? How much training has he or she had?

Long-term goals: Where does the person see himself or herself in 10 years? 20 years? Are those goals in line with yours?

Level of commitment: How long has the candidate stayed in previous jobs? How many times has he or she changed jobs?

Communication skills: Does the person communicate well? Is he or she willing to communicate?

Character: Is the candidate's personality compatible with yours? How does he or she treat others? Do you feel comfortable? What does your gut instinct tell you about this person? If your instinct says it isn't right, it probably isn't, Fassler says.

Core values: Does this person have a business philosophy and behavior that are similar to yours? Do you think alike?

Financial stability: Does the candidate have a good credit history?

Be prepared to answer the same tough questions posed by the person you are interviewing. Baker says, "If there are nonfarming heirs, the candidate also needs to know if there's opportunity to buy the business or if all the assets will go to the children and the partner gets nothing."

If either of the parties is unwilling to answer these questions, experts agree it could be a red flag that the relationship may not work.

Take a test drive. Baker recommends you hire the prospect as an employee for the first six months to get a sense of how the arrangement will work. That's what Steve Fisher of Grand Junction, IA, did with his partner-to-be, Brian Sandage. Sandage started out hourly, then was offered a salary and benefits, then eventually a partnership in a limited liability company formed around a new hog-finishing site.

"I was going to have to build an additional finishing site anyway for expansion," Fisher says. "So I offered him this opportunity to get into the business, also."

The limited liability company finishes pigs for Fisher's 550 sow farrow-to-finish operation, which is set up as a corporation. The arrangement works like any other custom-finishing contract, Fisher says. The corporation retains ownership of the hogs and pays for feed and vet services. In turn, the limited liability company provides buildings, management, utilities and labor.

"For now, I am providing the collateral to secure the loan for the buildings, and he is providing sweat equity to run the operation," Fisher says. Once the buildings are paid off, Sandage will get half the profits in addition to the regular salary and benefits he gets from Fisher's corporation. "Someday, I may sell the whole thing to him," Fisher says.

Put it in writing. Both parties in the alliance need to draft a written agreement that outlines what each is agreeing to do. It should cover who does what, who pays for what, and how profits and losses are divided. Such provisions will reduce conflict later on.

Joy Johnson, administrator of Nebraska's Land Link program, says the hardest part is figuring how income is divided and how risk is shared. "What I advise farmers is to make themselves a list," Johnson says. "Write down all of the expenses that go into running the operation and place three columns over the top: one column for the total operation, one for the older person and a third for the younger person. Decide who will pay what expense."

This will require that you assign values to land and equipment. "Generally, those are the two things the older person is putting in," Johnson says. "If the younger person had those, he wouldn't need you." You can get those values by looking at current rental rates or cash rents in your area.

Next, list input expenses like feed, seed and fertilizer and decide who pays what. The younger farmer may need to take out an operating loan to pay, but that is usually part of his or her contribution.

Next, estimate labor hours. Include labor rates and who will supply what labor. Rates should be adjusted to the task. "For example, if [the task] is on the management or marketing end, it makes sense to give it a higher rate," Johnson says.

University extension agents trained in farm management are a good source for establishing labor rates and determining how many hours go into a certain type of operation.

Get a lawyer. All the experts agree that, once both parties have agreed to a written plan, you should take it to an attorney and have a legal document drawn up.

The attorney can put a legal name on the alliance. This is important because you will be held to the rules and tax laws of the legal entity you form.

Going to an attorney will also help you know your rights under Amendment E, recently passed in some states like South Dakota and Nebraska. "It basically prohibits the use of business structures like limited liability partnerships or limited liability corporations unless it is a family farm," says Thad Olsen, agricultural finance and loan program specialist at the South Dakota Department of Agriculture.

For the operation to be considered a family farm, the parties have to be actively participating in farming on it, Olsen says. "The intent is to keep the large corporations from coming in and owning livestock."

Johnson says such laws should not be inhibitors to working with a beginning farmer. "In Nebraska, the 51% shareholder needs to participate in the day-to-day operations of the farm," she says. "And these gentlemen are planning to do that anyway."

Finally, the attorney also can draw up a plan for leaving the operation. Fisher had such a plan built into his contract that protects both parties. "The limited liability company is set up so I have ultimate control," Fisher says. "I can buy him out at an agreed value. He is also protected."

Fisher says developing a long-term working relationship is not an option for everyone because of different management styles and working philosophies.

"Some producers think they have to have it all for themselves," he says. "But in the right situation, it can help get quality labor long term."

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