The Australian Farmer

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the australian farmer

The farm or the family - for some a difficult choice

The price of land forces some family farmers to sell land to be able to treat all their children fairly.

By Dr Mike Stephens AM

In most farming families there are three main aims: The owning generation, Generation A wants to: hand on a viable farm to Generation B; accumulate funds for retirement; and provide a satisfactory outcome for the non-farmers in Generation B. In many farm families the three main aims are not achievable. There are four important rules in farm succession: • Rule one is to understand the needs, wants, aspirations, and expectations of each family member of each generation. • Rule two is to start planning now because it takes a long time to build a viable business 1 where succession is financially possible. The business must grow to stand still financially. • Rule three is to avoid passing on an indivisible asset to more than one person. • Rule four is to ensure family harmony is built and maintained. Farm succession has become more difficult be- cause of the increase in land values. The Bendigo Bank’s “Australian Farmland Values Report-2025” quotes compound growth of farmland, nationally of 8.6% from 2005 to 2025. That means a farm valued at $1,000,000 20 years ago is valued at $6,000,000 today. The earning capacity (return to capital) has reduced at about the same rate as the capital value has in- creased. A farm returning 5 return to capital 20 years ago might return 1% today.

The harsh reality is that data sourced from ABARES reports indicate the majority of the 49,000 of broadacre farms (sheep, beef cattle and crop) cannot achieve these three main aims. Sixty per cent (29,400) have a value of sales (total cash receipts or VoS) of less than $400,000 and are likely to have a net cash flow of minus $10,000 be- fore paying interest, principal, tax and drawings. There is no realistic prospect of business viability, and the family will rely on off-farm income. Selling the farm may be the best option if division of assets is required. Twenty-two per cent (10,780 farm businesses) have a VoS of between $400,000 and $1,300,000. Many of these businesses will achieve the three main aims if the older generation (Generation A) is prepared to let go, a member of the younger gen- eration (Generation B) is prepared to step up, and non-farming members of Generation B are happy with the deal. As an example, a farm with asset value of $2,200,000 , turnover (VoS) of $1,000,000 will have about $300,000 to pay interest, principal, tax and drawings. Assuming no other debt and the cap- acity to borrow 20% of total asset value, then borrowings of $4,400,000 at 6% interest is man- ageable, but leaves minimal capacity for draw- ings, re-investment, or increases in interest rate.

1 A viable business is one which can meet the living and educational expenses of the family, maintain the farm assets and grow the business to combat inflation and declining terms of trade.