with Don Fraser
Fraser Farm Finance
The New Zealand ownership of mainly dairy farms started with the 50:50 sharemilking regime in the 1960s-1970s. If you could cobble together enough cash to buy 100 cows and a bit of gear then find a farm owner who would sign a 50:50 agreement for three years you were good to go. If you scrimped and saved and got to 200 cows and had the herd largely paid off, you could sell 100 cows and the surplus young stock – and hey presto there was your deposit on your own farm. And remember then there was no taxation on stock increases, but it worked.
There have always been issues between farm owners and the 50:50 sharemilkers. Lack of fertiliser by the owners and lack of care and maintenance by the 50:50 man was generally the cause of arguments. And argue many did. In bad cases it was horrific.
Today there is a lot, I mean a lot, of dairy farm leasing. The financial pressure on small farms is immense. They are trying to meet new and emerging compliance and regulations, but do not have the economy of scale to carry it. Even if they are nearly debt-free the numbers barely work so they struggle along making very little money.
The emerging trend seems to be to sell the stock and the shares and lease it to a neighbour.
The numbers might look like this on a 200-cow farm:
Sell 200 cows at say $1700 $340,000
60 R1s at say $1000 $60,000
70,000 Fonterra Shares at say $6 $420,000
Repay debt say $500,000 $500,000 –
Spare cash to invest? $320,000
Say the farm was 70 ha producing 70,000kg MS
Rent from the neighbour 70 ha @ say $1300 $91,000
Rents do vary above and below that figure depending on a whole range of factors including infrastructure, location, contour, buildings, and so on.
On top of the $91,000 above, many people stay on the farm in their existing house so you have say $300,000 to invest in this example at say five per cent:
Total income $106,000
If they chose to live off-farm then funds have to be found for a house, but most farmers seem to stay put.
Now the tenant pays all the outgoings including rates and insurance. There will be a small adjustment in rates if you occupy the home. The cowshed gets shut-down and the pond decommissioned and peace reigns.
I’m not that keen on leasing these small farms to a tenant who runs the business self-contained. There is no economy of scale and arguments start very quickly.
With the leasing to the neighbour, he connects up his races to yours, walks the cows through the boundary – and, hey presto, it is a very good option for all concerned.
Clearly, as the farm size increases you get a better economy of scale and therefore it can be leased as a self-contained unit and it becomes more viable for both the landlord and tenant.
In summary, instead of selling up your farm an option may be to lease it to a neighbour or as a self-contained farm if it is of sufficient size. If there is a lot of debt the leasing model does not really work as interest costs take up the bulk of your income.
Leasing your farm to the neighbour is a very good option and retains the land in the family for the future. Farm leasing is the emerging tenure and largely replacing 50:50 sharemilking.
I will discuss percentage leasing next month, a concept I introduced to the industry.
Disclosure: I do a lot of farm leasing in my business and therefore have a vested interested in this practice.
Disclaimer – These are the opinions of Don Fraser of Fraser Farm Finance. Any decisions made should not be based on this article alone and appropriate professional assistance should be sought.
Don Fraser is the Principal of Fraser Farm Finance and a consultant to the Farming Industry. Contact him on 0800 777 675 or 021 777 675. A disclosure document is available on request.