Kiwi ownership models could be the way forward
Greetings from New Zealand. I have spent almost five weeks travelling around the country meeting farmers, lawyers, accountants, consultants, bankers and many others as part of my Nuffield Farming Scholarship studies.
My study entails looking at pathway to land ownership through share-milking, contract milking and equity partnerships. This is against a backdrop of our milk quota system ending in 2015 and the environmental obligations being imposed on farmers in New Zealand, especially around the use of water and the discharge of effluent.
Costs have certainly risen for Kiwi dairy farmers, with the investment required in Fonterra shares and land prices having grown rapidly over the past few years. Indeed, land values are now comparable to values in Ireland.
In recent years in New Zealand, some farmers borrowed money to invest in agricultural land in anticipation of rapid capital appreciation. This has created difficulty for some farmers who leveraged borrowings on high land values which have since dropped back by as much as 30pc.
Hard lessons have been learned about buying land in the hope of capital gain and farmers are more conscious of factoring in the ability of the farm to generate good cashflow as a priority before the potential for capital appreciation.
There is no capital gains tax (as we know it), gift tax, inheritance tax or stamp duty in New Zealand, although the Labour party has signalled an intention to introduce some form of capital gains tax if they get in to government.
However, farmers who buy land with the intention of improving it for dairying and subsequently selling it on have to tread carefully as they can be deemed to be trading in land development and subject to the equivalent of capital gains tax on the gain made on the sale.
The highest rate of income tax in New Zealand is currently 33pc, applicable to profits of NZ$70,000 plus. The corporate tax rate is 28pc but the effective rate is normally 33pc as a withholding tax of 5pc is applied to dividends.
Many farms tend to be owned by trusts and operated through 'look through' limited companies or limited liability partnerships. The principal benefit of owning land through a trust is to protect the assets in the event of marital breakdown.
The price of cows varies depending on the milk price and ranges from €750 to €1,300.
The availability of 50:50 share-milking contracts, where the share-milker and landowner split the milk cheque 50:50, have almost disappeared and the percentage of the milk cheque which landowners divide with share-milkers is typically between 22pc and 26pc. Contract milkers are normally paid between €0.65c/ku and €0.75c/ku of milk solid.
Interest-only loans are still quite commonplace with an interest rate currently of 5.5pc to 6pc (generally variable rate). The return on assets/equity in dairy farms in New Zealand is currently between 8pc and 10pc so it makes sense to borrow in order to fund expansion as farmers are growing capital by using the banks money. The risk is that the percentages change, so budgets need to be stress-tested to account for higher interest rates and lower milk prices.
The banks tend to lend at a 50-60pc debt to equity ratio and have been forcing farmers to reduce their debt to this level as the market value of agricultural land dropped by almost 30pc over the last four years. However, there is a lot of competition among banks in rural lending so finance is readily available for investment in farming. In contrast, commercial lending has remained conservative since the onset of the global financial crisis.
Governance is a buzz word among farming stakeholders in New Zealand. Governance means that there is a defined structure to directing and controlling the business.
This includes regular meetings and assigning people responsibility for different parts of the business, such as operational performance (cows and grass), financial performance (profit and return on investment), management performance (people), etc.
This has arisen as a result of farmers having amassed very valuable assets which need to be managed and protected for shareholders or future generations.
Banks are insisting that good governance procedures are in place before they will lend further to farmers.
Industry stakeholders believe it is equally important to regularly measure performance by bench marking against performance against farms of a similar scale.
This is achieved in New Zealand through the Dairybase system where farmers consent to share their financial results with other farmers on an anonymous basis through a database, the information often fed into the system by their accountants.
Accountants can get financial data directly from the banks in preparing accounts and tax returns.
There is accounting software such as "Bank Link" and "Rural Cash Manager", which allows accountants to download bank statements from the bank directly. Accountants can also download livestock data, wage books, etc directly from a farmer's computer.
These online systems give farmers better management control through better budgeting ability.
Farmers tend to keep farms in manageable blocks rather than farming all the land they own together as one unit.
The principal reason put forward for this was that it allows farmers to sell off a farm at any point without affecting the operational ability of the remainder of the land.
It is also easier to sell smaller blocks of land than larger blocks.
Contrary to popular belief, less than 10pc of farms in New Zealand are owned by corporate entities; the majority of farms are family owned. The average size of a herd is 383 cows and the average area farmed is 138ha.
Before a foreign investor can buy land they must get consent from the Overseas Investment Office. The cost of making an application for approval is approximately €13,000 and the office provides guidance as to what criteria the foreign investor must satisfy before the investment will be approved. The procedure was scrutinised recently as part of the Crayfur case, which also served to highlight the need for good governance procedures in farming.
Consent from the Regional Council for matters such as water and effluent is required before you can operate a farm in New Zealand.
The consents were traditionally granted for a 30-year period, but newer consents tend to be for a period of 10 years, after which time they need to be renewed.
For example, in the Rotorua District to obtain a new resource consent, the Bay of Plenty Regional Council will now require effluent ponds storage for approximately 90 days at a cost of around €65,000.
It appears to be popular opinion amongst stakeholders in the New Zealand dairy industry that the abolition of milk quotas in Europe will cause a distortion in commodities for two to three years, but they expect markets to then return to normal.
Many have questioned Ireland's planned increase in milk production by 50pc given the constraints to expansion by a perceived lack of access to land or finance.
Thankfully, work is already underway in looking at the role of partnerships in facilitating expansion in an Irish farming context.
Hopefully there will be other options from New Zealand that can work here.
Note: €1 = NZ$ 1.565
Disclaimer: The information in this article is intended as a general guide only. While every care is taken to ensure accuracy of information contained in this article, Aisling Meehan, solicitor tax consultant and Nuffield Scholar ,does not accept responsibility for errors or omissions howsoever arising. Email email@example.com
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