Succession can be a very challenging process. Farm succession planning always starts with ensuring the business is profitable and has strong financial performance according to Peter Bosworth from Bosworth Capital.
Bosworth has been involved in advisory and banking for 35 years with a special interest in agribusiness both within the farm gate and also outside the farm gate. He has also been involved with investment banking – capital raising both debt and equity, and merger and acquisitions for a number of businesses that service the primary sector.
Most succession plans work on trying to be fair to the non-farming siblings and if possible providing them with some capital earlier rather than later so they can buy a house, business or have capital to invest elsewhere. That can be easier said than done, so in order for that to happen the farming business has to have a solid foundation and strong financial performance.
Given the return on capital is generally low for farming, in the 2-3% range for sheep/beef units, and 5-7% for dairy units. Compared to other business types, that makes the ability to borrow money to make farm succession happen is a lot more difficult.
It is becoming increasingly harder to borrow from banks and as Bosworth points out banks are now requiring principal and interest to be paid back, where as historically debt servicing only was common. There is a real opportunity to capitalise on the current low interest rates to pay back more principal which can only be a good thing when considering things like succession or off-farm investment in the future.
Another interesting point is that farming is hard, not everyone can do it and you need to be better than average to really be successful.
Yet another consideration is encouraging children to do their own thing and this comes back to: the earlier conversations can start the better the outcome for all family members will be. If children are encouraged to pursue careers away from the farm or start their own businesses, then that can have many benefits and make the process easier down the track for when someone does decide to go farming.
It is interesting; family farms that have historically can only support one family, have moved in many cases to intensify their properties through various methods to increase productivity and profitability to try and support more siblings and make the succession process easier. But this may not be a sustainable option as we are now seeing a move away from squeezing as much out of the land as we can, as the focus moves towards sustainability.
Carbon neutrality a closer reality than realised
As we consider things like sustainability and increased biodiversity, which have been discussed a lot here recently, it was very pleasing to see positive research coming out this week for the sheep and beef famer.
Over the years there has been significant focus on the emissions from livestock production, this is well documented and has been thrashed by many people and groups, but little recognition has been given to the sequestration also taking place on-farm as part of the overall biological system. As with any business all factors of an operation should be considered for both emissions and sequestration.
Not only have emissions from New Zealand sheep and beef production reduced by more than 30% since 1990 (which was discussed in an earlier podcast), but new research shows that most of the remaining on-farm emissions are in fact being offset by woody vegetation.
Sheep and beef farmers are potentially close to being carbon neutral as a whole.
The research shows that native and exotic trees on sheep and beef farms are off setting nearly all remaining agricultural emissions, and woody vegetation on sheep and beef farms is offsetting between 63 and 118% of the on farm agricultural emissions through sequestration.
This independent study was headed by Dr Bradley Case, Senior Lecturer in GIS and Remote Sensing in the Applied Ecology Department, School of Science, Auckland University of Technology (AUT). The research was peer reviewed by Dr Fiona Carswell, Chief Scientist, Manaaki Whenua – Landcare Research and Dr Adam Forbes, Senior Ecologist from Forbes Ecology and Research Associate with the New Zealand School of Forestry, at the University of Canterbury.
The research reinforces the importance of farmers getting formal recognition for the sequestration happening on their farms. Significant biodiversity exists because of the hard work farmers have undertaken, farmers over the last few decades have made a deliberate decision to retire significant parts of their farms, which has come at great cost to their businesses, this must be recognised and they need to be celebrated for their forward thinking approach.
Last year the Government passed the Zero Carbon Act which sets targets for gross methane reductions and for net emissions of other gases. The Government is now working with the agricultural industry on developing a framework that will ultimately help achieve these targets. Farmer led discussions are critical and we need to see more of this.
If farmers are having to face a cost for their emissions, it is essential they also get a credit for the true sequestration happening on their farms.
The Emissions Trading Scheme currently only allows companies or individuals to register a narrow range of forestry to claim a credit for sequestration. This criteria is driven by international rules which were based on a range of factors back in the 1980s, such as how accurate satellite imagery was at the time. Most of the native vegetation on New Zealand sheep and beef farms is unable to be included in the ETS because it pre-dates 1990, but it is making a major contribution to climate change mitigation as well as biodiversity, soil erosion management, and water quality mitigation.
Angus Kebbell is the Producer at Tailwind Media. You can contact him here.
23 Comments
A wealth tax could collapse land values, which would actually help.
The problem is the sacrifice required to set your children up is quite a hurdle for many. Best if farmers only have 2 children and have them in your 40's, then make sure you stick to the same wife, no matter how much you hate each other, you need to be able to put up with a few knife wounds.
The more people complicate farm succession the more problems pop up. Lawyers are employed to find problems not solve problems. I have several friends who went to extreme lengths to get the right trust ,the right estate planning and they have been some of the worst disasters I know of regards succession.
I have a friend who ran the farm, the sisters went off and became successful lawyer and a doctor, when the parents died, it was a bun fight he could never win, he had been living on a shepherd's wage. Farms got sold after generations, they were early settlers.
Succession actually takes leadership, many farmers are happy working away on the farm, they don't develop the skills you need for leadership decision making etc, so they leave it to a lawyer and it's a disaster.
It seems a simple solution to me. Only the residential portion of the asset should be subject to inheritance law. That calculation (i.e., apportioning of value for a sale) is made for GST purposes anyway, isn't it? So, the child that wants to live on-site and work the land has to buy out the siblings based on the residential portion. If, as a sibling, you don't want to work the balance of land - what claim should you have to it? Makes no sense to me.
Ah yes been there Aj, in the lawyers office and all manner of witchery being advised. You have to have your game face on. So many folk are tied up in knots by trusts and companies. I have managed to resist the former. Got suckered into the latter recently. Hoping it works out...chatting with my daughter this morning about how complicated life has become. It would be nice to pack up and go bush ( or beach) but we are stuck on requiring the security of the status quo :-(
Part of the problem for succession planning is the greater expectations of the coming generation. Many expect a hand up or hand out, whether with the deposit on a house or a share of the farm value. There is less focus on retaining sentimental attachment to the land and more emphasis on what's their share of the dollar value. Partly, and quite rightly so, a consequence of a fairer division between offspring.
I have been directly involved in several succession processes. The best outcome to date, and the least conflict, did not please the farmer and his wishes to create a dynasty but was a consensus outcome among the beneficiaries.
I agree the starting point is a profitable farming operation and I would add to this the need to be of reasonable scale. The other point I would make is too many farmers guilt their kids into remaining on the home farm thereby limiting the kids aspirations to those of their parents.
Succession plans are only as good as the planner; including the true intentions of the settlors.
Alot of farmers are old school, and consider the farm should go to the son. We are in an interesting situation ourselves, where this was the original plan; which is part way through, only to find the son and daughter in law cant have any children.
Its disappointing the settlor(s) didnt discuss their intentions earlier, but now by marriage the sister in law has 10% of the farm'and possibly another 10% should the brother in law die. My sister in law and her young sons are the obvious choice for succession, but unless the brother in law and his wife are genuinely kind, this will not be financially possible.
We hold the cards, as we are financial enough to buy the borther in law and wife out'and will do if there is fairness and equity; where to date they hasnt been. Our next succession plan meeting is to discuss what happens if the brother in law dies; who currently runs the farm, and its going to be quite interesting to hear the answers.
Could be 160 years of farming disappear from the family, if the settlor doesn't see the wood from the trees and bring fairness and equity into the equation; not too mention the brother in law and his wife. Future rest home costs could sort it out anyway.
All earths proud empires fade away.
My father worked all his life to pass on land to future generations, at one stage we killed nearly 3000 cattle a year. Not a single thing remains, around the decay of that colossal wreck, boundless and bare the lone and level sands stretch far away.
A friends take away message from a recent presentation from economist.
Sorry can not remember which one.
Ten years ago farmer used to be able to sell the farm and buy 3-4 good houses or commercial properties.
Now they are lucky to buy one.
I counted up 5 of my neighbours whose farms are now worth less than our each of our investment houses.
Succession not possible.
And this neighbour is not interested now in buying.
With the compliance around water and whatever the Climate change commission deliver in conjunction with E Waka eke Noa this trend is not going to change I believe.
Until food affordability and availability becomes
a public issue this won’t change.
It was great to see the World food program get the noble peace prize over Greata and Jacinda.
Understanding food and water availability and affordability are essential not a need or want
NZ present policies will only make food banks busier over time in a country that can and should be producing the most nutrient dense sustainable food in the world.
You would have to wonder what sort of bizarro world we live in, while the productive sector languishes the non productive goes on a rip. How much trust do you have in Gov't. Can they with dropping interest rates and by increasing debt, keep the system afloat? Is that why we need a UBI, so we can keep paying the bill for the debt?
The fact is bank Capital Ratios are much less for residential housing and much more profitable for banks. So i'm going to ask, 'how much debt is too much'? If we are getting debt over 150k a head now, how effective will future borrowing be. Is there ever a day of reckoning?
Farming will just wind back a bit an most problems will be fixed, as usuall it's all about the %30 of farmers who have most of the debt and that's a lot.
Succession is the Elephant in the room along with finding people to work in rural areas. Forget its a farm, any business needs to have the potential to provide a yield on the capital invested. If the yield is very low, variable and controlled by factors well outside the influence of the operator it has a high risk beta attached to it and hence will be hard to find a buyer or pay very much. A lot of sheep and beef farms fall into this area at 0% to 2% return AFTER a reasonable level of pre tax drawings for the owner working hard. Land values have lost all recognition of this relationship with yield and seem to be driven by tax free capital gain - is this sustainable? Only when the system thinks so and continues to lend money based upon this premise which seems to have ended - finally (haha).
Many farmers have educated their children well - professional careers earning good incomes with 4 weeks plus annual leave and living in larger centres with services or overseas.
1 wants to farm and unless the others are prepared to forgo some (or most) of the "Market Value" its a recipe for no more Christmas dinners together.
"Better to get my money - buy a boring Meridian/Mecury share, 3 - 4% yield or a passive fund - earning over 8% per annum and keep my job" say the professional child and the partner.
This problem is here now and growing before any regulations - drying climate, wool worthless, leather and pelts etc etc. making yield harder all the time.
You can't keep handing a business down. As it gets split up you need to reconsolidate at times but to do this you need yield plus risk allowance to allow it to happen.
I have no intention of handing my business to my children - they are doing their own thing and it will be sold and they can invest the money and build their own things they want. They will get some assets jointly owned but they are passive and I have made it quite clear that once Im dead they can sell the lot if it guarantees they all have Christmas together.
Totally agree with the sentiments of your last paragraph. Wife and I are in the process of diversifying assets and though I would be proud to have one kid take over our farming business I don't want it at the cost of him living like a peasant under a mountain of debt.
My father wanted a dynasty with us brothers all farming together. We knew it wouldn't work - agreed to reorganize the family business and we haven't had a raised word since. And we kept the business plan simple with no complicated business structures.
JL - Agree. There are many farm/business owners who aren't on/in inherited/intergenerational businesses who echo your last paragraph. Also many parents aren't prepared to see their kids going into massive debt just to keep the family name on the gate. However I am aware of one farmer, who has no successor to his intergenerational farm, refusing to sell it, but will leave it to an extended family member who quite frankly would do the sector a favour if they decided to move in to a non farming career.
Nice to see some discussion around this . Family farming in NZ is as good as dead. The non farming siblings live the life while the successor (victim ) dies in debt and misery. Sorry to be so negative but but the outlook is not good . We have to develop a sustainable tennant farming system , that banks will lend too . They seem to have this in other developed farming nations.
I agree with many of comments by all. Have just purchased farm from parents. Im a 2nd generation sheep and beef. Father and uncles purchased this block in 1975 (4000su). Guy they bought it from left 50% of money in. They were able to pay him back after 3 years! My grandfather funded the other 50% at the time and he was paid back 3 years later again. By this time property sat at 7000su, and one brother was settled into another farm in early 80s. Two brothers farm in p/ship for another8 years, at which time another 4000su farm purchased to settle last brother. At this stage bank was lending a reasonable lump, but neverless the buisiness growth in total was huge. To think that sort of growth in that timeframe is going to happen now is totally unrealistic! Im now left with less than 50% equity in this farm. We make an ok living, but my guees is this family farm has done it dash with us. I cant see climbing out of this one to be able to hand it on is realistic. We will make enough to retire, and what is left to distribute and help children is a bonus!
"Sheep and beef farmers are potentially close to being carbon neutral as a whole".
This rather blows a hole through the top-down narrative that Ag is a major emitter. At the very least, it should direct mitigation and adaptation efforts to the actual net emitters, rather than the usual one-size-fits-all, top-down mandates from the 'We Know Best' crew.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.