The challenge of deciding what to do with an economic surplus was the theme of a recent Beef + Lamb New Zealand North Canterbury Farming for Profit workshop at Greta Valley.
It has been a profitable 12 months for most sheep and beef farmers who have been enjoying that rare combination of strong returns and favourable growing conditions and this workshop focused on how top performing farmers were spending their money and ways to smooth out income fluctuations.
Speakers included Esnes Grey from B+LNZ’s Insights team, accountant James Nell from Leech and Partners and Peter Savage, BNZ’s Head of Customer and Industry Insights. B+LNZ’s Chair Kate Acland also outlined the organisation’s Vision 35 strategy which aims to double the red meat’s sector export revenue to $23 billion by 2035.
How the top 20 percent of B+LNZ’s Economic Survey farmers are spending their money
Esnes Gray said the top 20 percent of farmers contributing to B+LNZ’s Economic Survey(ranked by EBITM) have their costs under control and know exactly where their money is being spent. Their Farm Working Expenses as a percentage of their Gross Income were around 10 percent lower than the average of 50-60 percent, but the money they did spend tended to be on fertiliser and irrigation- although this varied across farm classes.
While profitability and expenditure also varied across different farm classes, meat production was the biggest driver of profit across all farm classes with the top farmers for farm class 2 for example producing 91kgCW/ha compared to the average 69.6CW/ha. They were also producing more lambs, with lambing percentages of around 133 percent compared to the average 123 percent and they were selling 67 percent of their lambs prime compared to an average of 53 percent.
Esnes told the audience that profit gives farmers options whether this is investing on-farm – including farm system changes – or for personal expenditure.
With a Super El Nino forecast for this coming spring and summer, Esnes suggested farmers take heed of the lessons learnt during the 2015/16 season and plan ahead to what the action trigger points might be.
“It might be time to bank profits for next season.”
The survey data can be accessed on the B+LNZ website under Industry Data Sheep & beef farm survey | Beef + Lamb New Zealand
Taxing times
Most sheep and beef farmers made healthy profits last year which means a bigger tax bill.
James Nell, a Chartered Accountant from Leech and Partners encourages farmers to take a long-term view and try and smooth out their income, so they are paying less tax overall. This might mean paying more in marginal years, so farmers are on lower rates when profits are higher. This requires careful management of deductions and shareholder salaries.
He suggests farmers consider using the Farm Income Equalisation Scheme in high profit years to defer income and potentially reduce future tax. This means depositing money into an IRD account where it will earn 3% interest. The tax is paid when the money is requested back.
Another useful tool is IRD’s fertiliser deferral scheme. This allows farmers to defer claiming a tax deduction for fertiliser, lime, and associated transport or application costs. Farmers can spread the deduction across up to four income years following the year the cost was incurred.
This also helps smooth out income fluctuations.
The New Zealand Investment Boost, which came into effect in May of last year, allows all businesses to claim an upfront, immediate 20% tax deduction on the cost of eligible new or imported second-hand assets- and this includes land development. This front-loads the depreciation that would have been received in later years.
James also encourages farmers to use profitable years to strengthen the business. This could mean investing in fertility, feed reserves, repairs and maintenance and strategic investment.
“Tax should not be the main driver of decisions. Think wisely and spend on things that will benefit the business in the long-term.”
He urges farmers to stay in touch with their accountants so there are no surprises for anyone when it comes to paying the tax bill.
Succession planning
James also talked about the often-difficult issue of farm succession.
He encouraged farmers to start the discussion early and be clear about whether succession is a realistic goal for their family and business.
James believes it is important to develop an initial plan with professional advisors before involving the wider family.
He feels the next generation should be allowed to prove themselves by operating the farm business before land ownership is transferred.
After a lifetime of working, the retiring generation also needs to remain financially secure throughout their lifetime.
“Focus on what is fair, which may not always mean equal, between farming and non-farming children.”
Capital, climate and provenance
Peter Savage, BNZ, Head of Customer and Industry Insights rounded off the evening talking about the future challenges and opportunities facing the farming industry.
He encouraged farmers to think about building a farming business that would be worth more to their families, communities and country in 2040 than it is today.
Peter pointed out that farmers are always taking calculated risks ( possibly more than any other business) and investing in a future no-one can see.
A farm is land, but a farm business is different. A business can take opportunities and withstand challenges. Capital allocation becomes deeply personal as it’s a statement in what individual farmers believe matters, for example water and soil fertility.
“What story are your investments telling?”
He suggested that the agricultural industry was entering one of the most important transition periods seen for decades. Capital and labour are no longer cheap and compliance is becoming more costly. Uncertainty was becoming the new normal.
“This separates the businesses who allocate capital well and those that don’t,” says Peter.
He says the biggest risk for farmers was investing tomorrow’s profits in yesterday’s ideas.
“Farmers need to ask themselves whether the decision they make today still make sense in 10 years’ time. This is the difference between spending and investing.”
“Are we building a business that the next generation wants to invest in”?
Peter says soil, water, reputation, succession and leadership were all investments, although some compound more quickly than others.
“Every investment is a vote for the kind of farming business you believe the next 20 years will reward.”
“You can’t control markets, weather or politics, but you can control the investments you make.”
Climate change
Talking about climate change, Peter said it wasn’t a debate, it was a business risk, and farmers don’t have the luxury of ignoring reality.
He said climate conversations were often reduced to emissions, whereas the focus really needed to be on building resilience.
“In farming, it is resilience that keeps the business alive.”
He said adaptation was already in farmers DNA and irrespective of whether farmers believe in climate projections or not, resilience was critical to protect both farming businesses and market access.
“They’re not ideological questions; they are business questions.”
Provenance
Peter believed that provenance was both one of NZ’s best opportunities and conversely, its most missed opportunity.
NZ farmers deliver on landscape, environmental management, reputation and animal husbandry.
“We are one of the most trusted food producers in the world and yet we behave as are just selling commodities.
“Increasingly, our advantage will be trust in a world of uncertainty – and trust has value.”
He says provenance gave NZ producers the opportunity to compete on value rather than on price- although it was important that the stories we told about our farming systems were true.
Peter says he was incredibly optimistic about the future of NZ agriculture and while every generation will inherit challenges, it will also inherit opportunities.