Over recent years I have heard a number of farmers ask:
- Who is ever going to buy my farm?
- With the level of farm profitability and debt, how could a family member ever succeed to this farm?
There have been several articles in recent times that have recorded and commented on the fact that:
- the average age of NZ farmers is 58-65 years;
- in the coming years there is a lot of farm succession to be undertaken;
- capital and funding will be required to ensure succession and ongoing development can proceed; and
- there is a shortage of debt capital available from our banks which, it is estimated, will be only able to provide at the most two thirds of the required amount.
The shortfall has been estimated at as much as:
- $20 billion in the next 10-12 years; and
- $150 billion by 2050.
It is little wonder that, some time ago, Fonterra established an Equity Fund for its suppliers. Some see the gap being filled for ‘larger farming entities’ ($100m plus) by institutional investment funds, through sovereign wealth funds, foreign and local pension funds, iwi, and though high net worth individuals. It is believed that funding will generally come via fund managers.
This is all well and good for larger farming entities, but what about smaller businesses?
ANZ estimated it had access to a local and international pool of around $160 million looking for equity partnerships in the rural sector. A ring around the other trading banks indicated that the total available pool could be as much as $700m. The majority of this may well be destined for larger farming entities but, as is evident from the respective trading banks’ equity opportunities listings, there is interest below that level.
Earlier research on farm succession revealed that 68% of farmers have some sort of succession issue to deal with. The majority of the 800 respondents had at least one child who was interested in farming with 38.9% having no children with a serious interest in farming.
All in all, an issue and an opportunity to be addressed.
A different approach
I have seen a number of succession matters where the parties have to be advised that succession is not really viable given that there is inadequate equity to enable dad and mum to do what they want to do and for a child to be viable on the farm. Sale seems inevitable. However, I have found benefit in asking such parties to take the opportunity to consider expanding the pie by asking questions like:
What is the rest of the family doing?
This year alone I have seen several family groups use their combined assets to keep and better manage or improve a farm(s), or to grow the pie to benefit everyone.
What are the neighbours doing?
In more than one instance, we have found at least one neighbour with no succession alternative, a desire to stay in farming and be involved in a syndicate farming both properties. In this scenario, the increased scale and rationalisation provides an investment opportunity for two equity investors and as a result, everyone gets what they want.
What about further afield?
In another instance the home farm became the run off for a larger farm down the road. The owner of which (‘Dave’) wanted another five years’ involvement with the combined farm and it needed a farm manager. Dave’s brother became an equity party and he and the younger equity manager are on notice that Dave has, in terms of a ‘put option’, required them to buy out his shareholding at a price calculated in accordance with a predetermined formula.
In each instance, by thinking beyond the current parameters, options and opportunities can be created.