Cameron Weeks | Farm Business Consultant | 0427 006 944
Do you know of many investments that are worth 300% of what they were at the end of 2017? Whilst I personally don’t have such an investment (damn!) I do know of plenty, and they are all in the same investment class. Farming.
Yes, that is correct. Farming!
I have completed enough annual reviews already to see the clear trend that has emerged (of course with a northern bias because of where I work) and that is that 2022 has produced another staggering profit result which when combined with 2021 (for most) and significantly increased land values sees equity consistently 250-350% greater than what it was at the end of 2017. That’s right – the $5M business is now worth $15M, the $15M business now worth $45M and so on. All in just five years. Wow! As the title said farmers are now seriously wealthy! On top of this increase plenty effectively have no debt. The Planfarm Benchmarks 2021 showed 31% of businesses were 100% equity so after a bumper 2022 this will likely see 40- 50% at 100% equity.
This truly is cause for celebration. Whilst there is certainly a lot of luck in the booming land values plus the good seasons there is no luck in the typically high-level management being applied which has driven large crop programs, high water use efficiency, high yields, and thus outstanding profit results. The two record crops received by CBH in 2021 and 2022 are clear evidence of this.
Of course, if you are keen to buy farmland, especially if you don’t have scale behind you, then booming land values can be a constraint to your plans but capacity to buy aside I wonder if things were this good during the wool boom?
When times are booming one wonders when the bust will occur and as 2023 budgets, just like the 2022 budgets of a year ago, highlight farmers don’t want a poor production year now given the increase in the cost of doing business which is approximately 170% up in 5 years by my client records and that’s before equipment costs! Record profits could very easily become record losses that is clear.
But a bust? For that to happen land values would need to come off sharply and for land values to come off sharply sales need to be forced and demand dry up. Given the exceptionally strong balance sheets out there most businesses have a substantial borrowing buffer up their sleeve so the capacity to ride through a poor run of seasons is great.
So back to the statement that is intended to be a bit provocative – ‘farmers are commonly now seriously wealthy’. When I have said this to my clients, they have commonly replied that ‘it’s all tied up in land so is not real unless being sold’ or ‘we don’t have piles of spare personal cash at our disposal’ or ‘we don’t feel wealthy’ or something similar. Whilst these statements are quite likely true and certainly the average farmer doesn’t spend in an overtly wealthy way like perhaps wealthy ‘city folk’ might the fact of the matter is that this is choice and a reality of successful wealth creation (i.e. have your equity tied up in growth assets like farmland).
For the family farm this scale of wealth puts some pressure back on the owners (parents mostly) to successfully manage. You don’t want ‘wealth’ to create family issues after all do you and as we all know this does happen way too often.
To my mind some of the new challenges for you to consider and effectively manage include:
- Farm succession – is the traditional model of farmer(s) gets the farm and the non- farmers the off-farm assets anywhere near fair? If not how do you propose to manage?
- Estate planning – with or without farm succession how will you distribute your wealth via your wills or earlier?
- Bringing up children and young adults
– how do you raise young people to still value hard work, strive to achieve, respect the benefits that money brings and generally grow up to be quality people as most of you have done? After all, unless you give it away, they will one day receive the benefits of this boom period of wealth creation one day.
- Timing – when do you pass on some of this wealth with the above and other factors in mind (i.e. protection from divorce risk)?
Now I don’t sit here proposing to have all the answers, but I do know that first the reality of your position needs to be accepted, then you need to plan, seek advice, communicate, and then look to implement effectively and when appropriate. This will require some different thinking to what has applied in the past and acceptance that some trade-offs will be required.
In a coming article I plan to talk about an alternative succession model that may be of some benefit to you.
But in the meantime enjoy this boom period, make sure you are fully capitalizing and put your thinking cap on with regards the future of your family of whom I am sure most of you want the same thing!