Replies to This Discussion

Permalink Reply by Rob Moore on July 28, 2009 at 6:53am

Ray ,I have friends who have properties inthe vicinity who are very hard working and spend their life chasing there tail. Someone in your line of work told them that they had a "lazy " business. If you knew them you would laugh at the idea of them being lazy. To me this seemed to be code for borrow to the hilt and biuld a card house and wait for the capital gain to secure a "float" to do it all again. I have watched this model make people wealthy in a couple of years and made my plodding little to no debt regime look lazy indeed. The wheel goes round and all the cash flow sacrifices and hard lessons has made me difficult to deal with but after 84 years in family i don't like the idea of a bank pulling the strings, I can sleep at night and waist alot more time on this thing than i should do.
It is because of this experience that i am qualified to talk on profitability- there is none at present with our terms of trade and the capital gain model fell over last year. I would think on current prices people would be scratching to pay their interest. It is the reason my mug is all over this site looking for debate and change- I can tell you are in the same boat. My posts are not made out of desparation( tho most seem pretty negative)- Quite the opposite infact as while the world money system crumbles we have plenty of food and water and no debt and plenty of good stock to give away.
You have a good group here and while this isn't a question it may cause comment.

Permalink Reply by Deb Bain on July 28, 2009 at 7:48am

I like this discussion Rob, because I think it is common to so many farmers - this style of business management. In the "real" business world we would be laughed out of town. So what is it about our "reality" that makes us so different from a "normal" business? My guess is it is to do with the degree of unpredictability in our commodity pricing structure AND the whole social question that revolves around family businesses and our degree of reluctance to put that at risk ( ye olde albatross around neck story). Many businesses have one or the other of these factors, but few have both.

Ray, I think you could be valuable by talking through the advantage of the "top paddock" ( ie equity) and explaining how utilising this asset can be a very safe and useful business tool.

On completely the other side of the fence, I think another vital discussion should be had around "letting go" of the family farm. How many times do you hear a farmer say " I have to keep going, my grandfather would turn in his grave if I lost this farm". For that thought, they put their own health at risk ( mental and physical), and risk their family happiness, and often in the end, lose the ability to gain any financial value out of the voluntary sale of the farm. I say to these farmers - what type of Grandfather did you have that would insist on you giving up everything for the "glory of farming"????

How do you make valid financial decisions around this very emotional topic?

Permalink Reply by Ray Jamieson on July 28, 2009 at 8:29am

Rob and Deb,
Love your contributions. I'm rushing to catch a plane this morning, so I won't have time to answer fully til I get back to a hotel room tonight or as soon as possible. However, let me share a funny anecdote.
I was working with a couple on the land north of Gympie and doing a "risk profile" which I am required to do, to ascertain how much risk they are comfortable with in their lives. They answered EVERY question in the most conservative way. Then I reflected with them, "If you ARE so conservative, why do you live 40 miles from town on roads that can be flooded out? Why do you have $2m of assets here, that relies on a raincloud to survive each year (Their main cash crop is capsicum and their fallback is stud cattle)?

When we talked it through, they realised that they live in perhaps the most risky environment both physically and financially that there is in this country, but on a personal level felt they were careful and conservative. These lovely folks are probably very representative. They also don't like to have to borrow from banks to exist, but they know they have to sometimes. They know there will be years when there is no profit and their balance sheet is worth more for it's weight in paper than the figures on it. But they know they will always have capsicums and steak to put on the table.. Not something that people in any other game would accept as acceptable risk.
OK, I'm off to the airport, I'll check back in tonight!
Ray Jamieson

Permalink Reply by Ray Jamieson on July 30, 2009 at 9:58pm

Thanks Rob,
Deb Bain has asked a couple of questions that seem to roll your comments in too, so I'll answer her thoughts and you might like to respond there too...
However, I take your point about the "lazy" business... That's a definition that doesn't fit, either the person or the business. I think you recognised what they meant by suggesting they borrow to the hilt, and maximise their returns from it. Yes, you can do that, but only to the point of comfort of the people involved... More below..
Ray Jamieson

Permalink Reply by Ray Jamieson on July 30, 2009 at 10:26pm

Whilst farming and agriculture in general is being told to become serious business rather than a lifestyle, there are some limiting factors against that, and compelling arguments for it. While the farm needs to be a viable business, it is also home, castle, food source and a very emotional part of life, whilst also being that business. It often has generations of personal family history and tradition rolled into it, with sentiments on one hand diametrically opposing the forces calling for rationalisation, modernisation and profit centre economics. Yes, they are valid, but to retain the feeling of home, stability and security, some of those economic rationalisations have to be tempered or it becomes a business that might just as well shut up shop at 5pm so everyone can go home.

Farming can never become like that! With animals to feed, milk, tend and none of them working by the clock, add in the vagaries of the weather and seasons, it will never be a 9-5 job!

So how do we bring it forward? How can we add a business strategy to a farming strategy and have them work in together? There is an answer, and it does also depend on the personality of the people involved. Farmers and graziers in Australia, the conquerors of the bush, have become masters of leverage. Using a different form of leverage can make a difference, but only if you are on the right end of the lever!

What is leverage? The crowbar, rolling the log. Would you rather be on the end doing the lifting and pushing, or the end being pushed around and being unable to resist the forces acting against you? When that parallel is applied to financial leverage, then you know the answer. Intelligent leverage is sound, but you have to make sure the fulcrum point, the point of leverage, stays in your favour.

Bringing this directly to Deb's question, can you use the farm equity to advantage safely? In short, yes. You are already using it when you get an interest subsidised drought loan, because the criteria generally requires some security for the loan. Your overdraft with your bank is secured by farm equity. It's already happening.

I think the question was asking something more. Can you use the available farm equity for investment strategies other than just farm activities safely and to advantage? Again, yes. However, the criteria for all investment decisions (sowing a paddock of wheat is an investment decision!) is to know what you are getting into! Would you sow wheat one day because you had a free afternoon, the tractor wasn't busy and the weather was fine? Or would you wait til the right time and for the right soil conditions in May or June or whenever was the right time of the month for your district? Just because you can, doesn't make it right! You need to know about your investment strategy before you make the decision.

Should you use equity to invest in a parcel of shares or a rental property? The reason you would do this is to possibly secure an income stream from off-farm, to balance the volatility of on-farm income. If that was the outcome of the investment strategy, then it makes excellent sense to me.

Taking it a step further, if rural folks, despite not having a regular monthly income stream, paid themselves superannuation, that could also (now, with the law changes in Sept 2007) be a valuable leverage factor and create a self funding investment strategy if done correctly.

The first limiting factor is that working capital must be kept available for the farming operation, if that investment is to be made off-farm. It can't interfere with the farming business, or limit it, in any way. The second limiting factor is the "sleep factor" - at what point does this become an additional stressor, to the point where even if it IS financially viable, it causes more stress then the financial benefits it creates relieves? This factor is different between most people and even between the individuals in a partnership, marriage or business.

If your property is made up of more than one parcel, that is, more than one title, it's a good idea to keep at least one title free and unencumbered, to provide some peace of mind.

The emotional side of all of this - letting go of the family farm. It's a tough one, and one I personally faced. When I left my family farm, by choice, although leaving it in the family, I went off and built another business and bought another farm (in a warmer climate). However, my heart was ripped out when my home, the farm I grew up on, was sold. It was a decision that I wasn't involved in, and until after it happened, I would not have thought it could hurt so much. I was a thousand miles away in another business, but it still hurt.

How do you make this rational decision? It's a matter of "change management", where we transition from one situation to another. If this was a decision you were considering, what is your move to, from this situation? The void felt after moving off the land has been a source of incredible emotional upheaval that has led to serious and tragic circumstances. Where a landholder has been forced off the land, the tragedy doesn't end there, often it starts there. More needs to be done and possibly the Farmers Helpline here on Agmates could be a valuable resource for anyone in that situation.

Where it is a conscious decision for a family to leave the land, the decision needs to be made looking forward with enthusiasm, rather than looking back with regrets. What are you hoping to achieve by selling, moving, or just leaving? For your own personal peace of mind, what do you have to fill the void that taking yourself away from your home and way of life will create?

There are no easy answers to this, but to manage the change, if this is a consideration, have something to look forward to, rather than something to run from.

This is a huge topic and I would welcome other folks contributions here.

Ray Jamieson