Friday, March 29, 2024

New pathways for ownership goals

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While the number of traditional 50:50 sharemilking jobs continues to decline new hybrid structures are on the increase as young farmers still tread the pathway to farm ownership.
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The latest New Zealand dairy statistics show 2201 herds were run under 50:50 agreements last season, down from 2863 just 10 years ago.

The percentage of herds run under a 50:50 contract is also falling, with 23% run with that structure 10 years ago and 18.5% last season.

The number of variable order sharemilkers has grown over the same period – up from 1337 to 1534.

The fall in sharemilking opportunities, ever-strengthening land prices and volatile earnings mean that, for those aiming at farm ownership, innovative structures have to be considered.

Both farm owners and those wanting to get there are pioneering novel pathways.

They’re creating a twist on the traditional – hybridising, coming up with new partnership structures and increasingly looking to equity partnerships with a twist.

An honours paper published by former Lincoln University student Sam Clements-Stewart in 2013 looked at a range of structures including one where an established farm owner joined with progressive young farmers to form a sharemilking company that then had an equity stake in a farm that the established farmer also has an equity stake in.

The land-owning sharemilking structure gave the young farmer two cashflow streams, which allowed him to grow his share of the sharemilking business and his share of returns to fast-track equity growth.

‘Last season we had contract milkers looking at variable order sharemilkers and feeling hard done by. This season those same contract milkers are protected.’

AgFirst consultant James Allen said there had been a proliferation of novel solutions that could include sharemilking a portion of the herd and equity sharemilking arrangements with the farm owner or others.

Equity partnerships and variations on structures for equity managers were also a lot more common now, Allen said.

Another structure used in Australia involved the variable order sharemilker or manager sharing in any increase in capital value of the business based on before and after valuations.

In 2012 Allen and colleague Nicola Kloeten published a report on ensuring a viable progression path in the dairy industry.

Allen said he hoped to update the report later this year but recommendations for those thinking about entering equity partnerships or sharemilking structures remained valid.

Young farmers needed to lift their business skills in the areas of contract negotiation, due diligence and analysis of options so they could be sure the job or partnership would get them to where they wanted to go and that they understood the potential risks and rewards.

The volatility in earnings had created new challenges accentuated or minimised by different structures and it was critical young farmers understood these.

“Last season we had contract milkers looking at variable order sharemilkers and feeling hard done by. This season those same contract milkers are protected,” Allen said.

Those entering into equity partnerships needed to understand and consider how their shareholding percentage could be lifted over time and at what rate.

Recommendations for those considering equity partnerships included doing due diligence on the farm and the people involved.

As with all business investments they should be careful not to over-leverage, ensure adequate entry and exit strategies were included in the agreement, and ensure fair returns and wealth creation opportunities existed.

Allen said it was important to ensure everyone in the partnership was on the same page when it came to the farm system and profit expectations out of the business so progression was possible and shareholding in the business could be increased.

If the equity share was too small the equity manager could find it difficult to feel a sense of ownership.

Success benefits everyone

Align Farm Partners managing director Steve Reed has strong views about some of the traditional mentalities and the short-term nature of some farming structures – both sharemilking jobs and equity partnerships.

He believes that too often the business and personal needs of owner and sharemilker or owners and manager in whatever structure weren’t aligned closely enough.

For sharemilkers the three-year cycle could create short-term horizons and behaviours that weren’t in the longer term interests of the farm, but they could also impact on the sharemilker if they had to up-sticks with the family and find a new job.

“There’s no time for people to really become part of the community. They might be bringing kids into the schools but it’s hard for parents to settle in and take on leadership roles. There’s little sense of permanence.”

The same went for the way some farms were set up and the way staff were managed.

“It comes back to that short-term mentality again. I think it stems from the fact that for a long time farms in New Zealand were run for capital gain rather than creating a long-term, sustainable revenue stream,” Reed said.

Steve and Angela Reed – dairying structures need an intergenerational view.

It meant capital investment and ongoing investment was kept to a minimum.

“Putting in the smallest shed you can get away with, the cheapest house, making sure effluent systems are compliant but no more than that. That makes it tough on those working and living there and we get good young people burning out and leaving the industry.”

It’s one of the reasons Reed and his wife Angela, along with Bahamas-based Kiwi John Buchanan, have set up their equity partnership farming business Align Farm Partners in the way they have.

“We’ve gone in and set up the farms with an inter-generational view right from the start so the people going on to them have everything they need to run the business at an optimum level.

“That’s our aim, set up these farms so good young people can come on to them and then kick start them on their way to farm ownership. If it’s all there then they’ve got the best chance of succeeding and so do we.

“Our interests are aligned.”

The company currently has four spray irrigated dairy farms in Mid-Canterbury and one large support unit near Mt Somers with all farms within a 50km radius of each other.

Reed said the aim was to bring in carefully selected, motivated, skilled young people as equity managers and help them gradually build their stake which would in turn release equity for the company and allow it to repeat the process with more farms.

‘That’s our aim, set up these farms so good young people can come on to them and then kick start them on their way to farm ownership.’

The company targeted a debt to equity ratio of 50% and initially equity managers took about a 10% stake in that 50% but the company’s owners were prepared to back the right people and help them with that initial investment too.

“We genuinely want to create a pathway to farm ownership and put people back on farms. To do that we have to give them the tools to work with so the right sized dairy, good, reliable irrigation, good BW cows, a future-proofed effluent system – they’re all part of that.”

The business was structured to deliver a dividend and targeted 20% cash returns.

The equity manager earned a competitive base salary but could also earn a significant performance bonus that was realistically set around performance relative to budget targets.

“We have to deliver on the infrastructure and they have to deliver on the onfarm performance but at the same time we recognise that these young people often have families and they need to have a life in the community, outside of farming, too,” Reed said.

Staffing the farm with quality people keen to learn and grow was important, as was ensuring managers could set up clear systems for staff to follow and that systems were simple and low-cost.

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