He told the New Zealand Future Farms Conference there were 500 non-family equity partnerships in this country.
He now farms 900 cows at Pleasant Point in South Canterbury but earlier, when working on a farm managing 1000 cows, he ensured his salary worked for him. He bought heifer calves and paid for their grazing to create an asset so he had equity when he went sharemilking, although he still needed a guarantor.
“And that’s where families can play a pretty vital role for the next generation – not to give the money out but to guarantee it,” he said.
He quoted figures from an ANZ survey which showed 52% of farmer respondents were worried about farm succession and 24% of them expected a change of ownership in the next five years for their business to continue.
Often non-farming siblings wanted their share of the farm asset and buying them out could be difficult.
“If you have a $10 million farm asset and divide it four ways for one sibling to run the farm, and pay them all, it’s quite hard and quite scary,” Groves said.
“That’s why we see the breakdown of family businesses and farms being sold.”
Different ownership structures were providing new pathways into dairying.
First there were partnerships which could be whatever the partners wanted, with profits and losses split accordingly.
Tax wasn’t paid by the partnership but by the partners on their own taxable income. On the downside one partner could become liable for any debts incurred by the other, putting personal assets at risk when used as security for a bank loan.
Difficulties could arise too when one partner decided to leave the arrangement.
Then there are limited liability companies, legal entities in their own right, to which it was easy to attract investors, as well as to sell or pass on shares to others.
Equity partnerships also created opportunities for young farmers but the risks included the difficulty of exiting.
Provisions should always be made to cover something going wrong, such as a marriage break-up or a contract being lost. An example he showed was of a family trust owning a sheep and beef property buying a dairy farm using their current balance sheet equity. The son created his own company and leased the dairy farm from the trust. That company owned all machinery, livestock and farm improvements and a set lease of $240,000 was paid each year, around $1/kg of milksolids.
All the farm income went to the company apart from the Fonterra dividend, creating a good return on investment. If it was to buy the farm it would be at the current market rate. Should the farm be sold, all improvements must be bought back by the family trust.
Another of Groves’ examples was an equity partnership, with a 50% debt-to-equity ratio, created by five sharemilking couples and five farm owners. The minimum investment was $100,000, funded by the investors’ existing businesses and interest covered by them.
All profits made on the farm, run by a sharemilker who is not one of the investors, will remain within the business for the first three years for development.
The risks were that more than one partner might want to exit at one time, that shareholders’ own companies failed and that there was limited scope to grow shareholder wealth.
The importance of clarity
Clear governance arrangements are needed with equity partnerships, Groves said.
Three years ago he and his wife were talking with a stock agent about buying cows owned by a partnership. Eight different prices were being sought by different members of the partnership, four in the North Island and four in the South. Six weeks later the couple still didn’t have the cows and gave up on the idea.
“That was a prime example of the need to have clear governance on who is in charge and who makes the decisions.”
