Anne Hardie

Equity partnerships may be an option for farm owners who want to retire but are struggling to find buyers in an uncertain property market.

On the West Coast, Westpac is open to equity partnerships to create cashflow for owners who want to step back from the farm and achieve a good return on their investment. At the same time equity partnerships enable first-farm buyers to get a foot in the door toward farm ownership.

Westpac agribusiness manager for the West Coast, Ana Paterson, says many dairy farmers in the region have been through tough times in recent years. Under Yili Group’s ownership, they have been paid for their shares in Westland Milk Products and now look forward to improved payouts including advances of about $6/kg milksolids (MS).

“This makes the business more attractive to both sides of an equity partnership,” she says.

“If there’s no interest in the farm, they are unable to sell or they want some equity out of the farm or want to pay debt, it’s a good way to get some cash injection and still have a percentage of the farm. They can have an equity partnership and still be able to get that return on investment.”

The bank requires an equity partnership to have a minimum of 50% equity in the property and be fully secured, she says. Ideally, equity partnerships work better with 65% equity as a starting point.

To show how such a partnership would look, she has created the figures for a typical dairy farm on the West Coast. In this scenario, the 220-hectare dairy farm milks 450 cows to produce 180,000kg MS and the property is valued at $4 million, with the total enterprise valued at $4.87m.

To reach 50% equity in the partnership, the partners need to contribute 50% of the enterprise value. The vendor might leave $1m (42% share) in the farm and the operating partner could contribute $1.421m (58% share). Paterson says proportions may vary, depending on the number of partners and the specific circumstances.

Assuming a long-term milk price of $6/kg MS, interest rate of 5.75% and cost structure of $4.40/kg MS including management wages, the business would have a surplus before tax of $167,400 which gives the equity partnership a 6.91% return on equity. The figures use a long-term milk price and interest rate, whereas current milk price is higher and current interest rate is lower.

For those looking toward farm ownership, such as sharemilkers with equity built up in cows and machinery, she says equity partnerships enable them to own a share in a full farming business as a step toward farm ownership.

Shari Ferguson from Bayleys, who has a banking background, says equity partnerships are not new on the Coast and lessons have been learnt from the past when everyone went in with a lot of goodwill, thinking it would be a bed of roses and then hit hard times when payouts dived. Since then, equity partnerships around the country have matured and she says there are good models to follow to make them work.

‘For a successful equity partnership to work, you need outside partners and you need to set it up as a business model and not just farmers who think it will work.’

“For a successful equity partnership to work, you need outside partners and you need to set it up as a business model and not just farmers who think it will work. You have to have a model at the beginning with a formalised agreement about regular meetings, how everyone will be updated and how you will deal with different opinions.

“With the payouts in the past and uncertainty around the dairy company, the risks have been too high. Now we’ve got a lot of older farmers wanting to retire and it’s harder for the younger generation to get in, so we have to look at new ways for them to get a foot on the ladder.”

More farms have been listed for sale since Yili took over Westland Milk and Ferguson says Yili’s cash payments for shares means farm owners have been able to reduce debt or do some much-needed capital work. That would help an equity partnership, she adds.

Despite more farms on the market, sales have been few and far between on the West Coast – a trend shared around the country – with just a couple of sales giving some indication of prices. The range sits at $15,000/ha effective to $20,000/ha effective with many for sale around $20,000/ha.

Little has been spent on infrastructure through the low payout years and she says some farms will need to have money spent on them. On the positive side, she says that provides a challenge and opportunity for younger farmers to make their mark.

John Redpath

The key to a successful equity partnership, Coach Approach Rural consultant John Redpath says, is having a business that is sustainable and viable as well as some ground rules about how it is distributed.

“There are some really effective equity partnerships out there with clarity of where they’re heading, a business model that produces surpluses and an effective communication process.”

The partners need to be clear on whether they need a cash return (income) or are comfortable investing all the capital back and growing the business, he says.

The simplest equity partnership for a farm business is a younger family member teaming up with mum and dad as that develops a pathway for them into the business. He says those conversations have sometimes never happened and the realities for both parties have never really been discussed.

Before farm owners can decide what to do with the farm, they need to work out what the outcome will look like and what if feels like and Redpath says most people want the family to be happy and they want enough capital to be able to move on with their lives.

“Sometimes the first thing for those farm owners is understanding the reality. If they were to move off the farm, what would they need to live on?

“They need to be clear what outcomes they want for their family and the farm. The next step is understanding the reality and if they can have those outcomes and retain the farm.”

That means working out how much capital will be required to set themselves up when they leave the farm and how much income they will need. That may be $1 million or so for a home and vehicle/holidays, plus $100,000 a year to live on, depending on their goals.

Once they have looked at their options, they may decide it is better leaving money in the farm than putting that money in the bank, he says.

It’s not just about money either.

Retiring farm owners will likely need to step back from managing the farm if they go into an equity partnership, whether it is with a sharemilker or manager buying into the business and that can be hard.

“You need to be able to step back. Are you going to be living on the farm and looking over their shoulder? For a lot of farmers, it is their life; it is who they are and they still want their skills appreciated. For the incoming equity partner, one of the skills is being able to ask and extract that 40 years of knowledge and experience.

“It comes back to whether they can effectively communicate and have the right conversations even though some of them are really quite tough. And for older farmers being able to acknowledge the ideas coming through. They’re better to work things out at the start instead of finding out two years down the track they’re not compatible.”

A big part of that is working out at the beginning, before going into an equity partnership, how each party’s values and goals are aligned, as well as timeframes for the partnership.

“They need to be in there long enough to extract the potential of that investment. But the reality over time is their needs change.”

Many equity partnerships fall over eventually because someone needs capital and the farm can’t pay them out, he says. That’s when governance and a good structure is essential. When there isn’t a process set up to talk through the tough issues, things can fester.

Finding the right people to team up in an equity partnership is critical to its success and Redpath says it often happens through networks or word of mouth.

Sharemilkers are an obvious option, with equity to buy into the business and skills to grow it. On the West Coast, many farms lack the scale to provide sufficient return to equity partners, but Redpath says the incoming partner could provide the equity to buy a neighbouring farm to grow the business to sufficient scale with increased cashflow to provide options for the business.

“You can use equity to expand the business next door. You can’t borrow 100% to do that and the (sharemilkers) can use their skills for a larger farm.

“Cashflow is paramount. In the past people have had inflated land values, but we’re in a period where that is not happening. If they have cashflow, though, they have options.”

He recommends anyone looking at equity partnerships to start with a standard shareholder’s agreement with decision making, plus entry and exit clauses, which can be obtained from various banks and professionals. Alignment of values, expectations and goals is essential, he says.