Harvesting Legacy: Affordable Farm Succession Planning for Long-Term Prosperity

As interest rates rise again and long-term financial planning is more important than ever, let’s look at what you need to think about if you want your farm to go onto the next generation. 

Many family farms have been around for generations, and are the central influence on the values, purpose and history of a family. While you may want this legacy to continue, it’s important to start thinking about succession planning early and understand your farm affordability.  

When we work with a family at SproutAg, there are some key questions that we need to look at to begin helping you with your succession planning:  

• Does your family want the farm to continue onto the next generation, and is the next generation prepared for this? 

• What can the farm afford to pay existing owners and non-working family members? 
• What lifestyle do the existing owners require post-retirement and how much money is needed to fund this?  
• How much can the farm actually afford and what is a sustainable debt level for you? 

 We often see that the family leaders or existing owners are not clear enough around their intentions and desire to ensure that the family farm continues onto the next generation, or haven’t considered long-term planning for this transition. This is based on their own core values and is up to each individual family, with no right or wrong decision. It is really important that the family starts to assess “farm affordability” in a sustainable year in year out scenario. This means understanding the maximum debt that the farm can take on to remain sustainable while being able to run efficiently.   

So, how does my family’s farm affordability affect me?  

Existing Generation: Get Advice on Farm Affordability Early

SproutAg recommends you seek guidance from a professional to understand your farm affordability using a range of different tools, as this will help you, as the existing generation running the farm, to understand what you can and can’t do financially. You also need to know what you want and the type of lifestyle that you require into the future if you are to exit the farm partially or completely. During this process, SproutAg will run audits of five years of cashflow on your personal expenditure so that you can properly understand your own expenses outside of the business to identify what this lifestyle would cost you. This can take several meetings to help you align your financial planning with your long-term goals, however this is vital for understanding farming affordability and effective succession planning. 

Next Generation: Be Part of the Team & Understand What’s Expected

 If you are the next generation set to take over the farm (i.e. your parents are currently running it), it is just as important for you to understand the farm affordability so you can make an informed decision on what your future might look like. Circumstances may mean that current stakeholders are being compensated at a higher level than is sustainable, where ultimately the farm has to be sold in years of lower commodity prices or rainfall. This can be devastating to the family if the whole intention was to retain the farm in the family. As the next generation, you need to be able to have clear insights into your farm affordability and how to run the farming business at a sustainable level so that you can continue it on. 

Involve Non-Working Family Members & Help Them Understand Farm Affordability

 At SproutAg, we find that often the non-working family members on a farm can feel quite negative towards the next generation taking over the property. In reality, there are usually a lot of challenges that come with gaining equity in the farm such as tenure, inability to sell and often debt to compensate australian white suffolk conference family members. Once the non-working family members have a robust understanding of farming affordability and see that the financial position is often not as strong as originally perceived, it can help them gain a greater understanding and perspective to improve family relationships.  

Cash is King in 2023! 

As you’re probably already feeling, overall profits and, in particular, cash profits, were not as strong as predicted for most agribusinesses last year. Despite rainfall levels being fairly good in 2022, rising input costs and some agriculture commodities tracking backwards meant a hit to the market. While every client, farm and operation are different, 2023 is the year where cash and working capital is King! 

What we are generally seeing across the market is that planning for the year has been pushed back. This is a result of the overall unprecedented cash profit capacity of 2023, driven by factors such as a later than normal harvest and many clients taking longer breaks off work than usual over the Christmas period, particularly being the first Christmas in many years not impacted by Covid. This month’s article will provide you with useful information about cash planning for 2023, and some key focus areas that are we are concentrating on with our clients that might help you too. 

• Cash flow forecasting system – it’s time for a change.
   

It’s time for a review of your cash flow system and processes. Is your current system working well for you and appropriate for what you now need? If not, it might be time to update or change it.  

Think about who and what is contributing to your resources and remember that cash flow can quickly become negative when not all working members of the family are contributing to the cashflow. 

When you are trying to forecast your cash flow, remember that most forecasts change constantly so the ability to have a rolling forecast that adapts from month to month is critical. A good way to keep track of the changing forecast is by diarising this in a business calendar and establishing a reference forecast for the year ahead.
 

Ensure that the working capital for the farm is getting you the right return on investment, and at the right time. If you have a major capital program with a longer payback, there is a risk of it getting delayed, so ensuring you have a higher return on investment project with shorter payback is critical and can help you with forecasting. 

• Financing and Banking Payments 

One of our key focuses with our clients is reviewing their current payment schedules and amounts. Balloon payments in particular should be reassessed with current interest rate rises, and if necessary, you should look into seeking extensions or restructuring your loan where possible. Plan to go to the bank just once this year and set the right limits from the start. This is important to ensure any additional expenses or potential rises are included so that you have the right working capital limits all through the season. 

Even if you have cash in the bank, having the capacity to preserve more than you think you need is critical to not getting caught short later in the year. We are seeing this trend across a lot of clients, with more and more machinery that is usually paid in cash being financed instead, which preserves cash flow rather than being stuck later and not being eligible for loans. 

Take the time to review all your finances as you plan for the year, ensuring you have more working capital than you need in this very inconsistent market with consistently rising rates. This includes looking at your current payment schedules, and potentially spreading your payments out longer if you have the ability to pay it back. Changing to interest only payments could be an option to improve your cash flow this year too if you can, rather than operating on principal and interest. 

• Machinery Capital Planning Tools 

Machinery can be one of the biggest expenses that impacts your cash flow. Taking a proactive approach to planning your upgrades and replacement to equipment in a cost-effective way can prevent you getting caught out when you can’t afford it. SproutAg has a Machinery Capital Planning Tool which can help you determine what is strategically required in the next three years and assist in your proactive planning. You can also assess your return on investment and decide the best option for you with our Contracting or Ownership Comparison Tool.

Another way to get on top of your planning is to compare the usage of your machinery to industry benchmarks and understand the overall effectiveness of your equipment to make informed decisions.  

With so many changes happening and predicted to happen in the financial market, it’s important to prepare and plan your cash flow, which might look slightly different than previous years. Most importantly, be flexible in your approach as the industry, the economy, and predictions will constantly change, and remember – cash is king! 

If you have any questions, please reach out to your nearest SproutAg adviser. 

In 2021, disruptions in supply chains and increasing inflation have made headlines across the world. These disruptions in the supply chain are having two impacts; increased cost of production and few goods available for people to buy. The flow on from this is an increase in price for goods, which is driving inflation and why the recent US CPI increase is at an almost 30 year high.

Australia is no different with the ABS announcing CPI had increased by 3% over the last 12 months ending September 2021. So, what impact does this have on your farm?

Working Capital Accounts

Cash flow is the lifeblood of any business, something challenged with continual price rises that cause you to revise your budget. In addition to this challenge is the lack of certain inputs, like urea, you need to operate your business causing disruptions.

In the case where you know an input will be difficult to buy it’s a good idea pay close attention to them, purchase up extra quantities so you have it on hand when needed. This strategy will mean you can continue to operate but it will cost more as you buy in larger quantities.

Five Tips.

1. Work harder on your return on investments to get the most out of your assets.
2. Look at your expenses across the whole business, prioritise them and put more focus on expenses in general so you are only spending on what adds value.
3. Increase the majority of your expense items and make sure you have a strong understanding of your working capital position in advance.
4. Plan increases to your cash or credit lines that can be used against your expenses in advance.
5. Plan for delays in supply chains as they’re not likely to ease soon so you can calculate how much inputs you need to purchase.

By following these steps, you can manage the speed bumps that come along with inflation and supply chain delays to keep the farm running efficiently.

If you want to be able to buy the right place in today’s property market, you need to be organised and prepared. When working with our top clients who intend to buy farmland in 2023, we start working with them in early 2022. This is because the current seller’s market with land prices rising significantly across all markets in recent years have meant success relies on a person being prepared and agile to be successful.

Considering settlement is around 40 days, an auction or expression of interest period can be as little as six weeks the ability to have your finance in place can be the difference between you buying the land or missing out.

Another factor, we’ve noticed is the reactionary nature of purchases as people tend to be too busy working in the business to think through what they need to do and start working on. Two main factors for this are:

Lack of time

The day-to-day operation of a farm can often take precedence over the preparation needed to take on the next acquisition. It can be easy to underestimate the work involved in obtaining finance and the time needed to find out the right information. You should also consider getting a second opinion when getting financial advice.

Agri-finance is also inconsistent and complicated meaning it can be time-consuming when you are trying to find out information. We’ve seen inconsistency right through from obtaining credit, to structuring and pricing.

Understanding bank requirements have changed

Gone are the days when you turn up the bank and secure finance based on your loan to value ratio (LVR) and equity position alone. Instead, cash flow and showing you can repay the debt is critical for raising finance.

Banks look at your ability to repay your finance even when interest rates rise against your cash position in order to make a decision. Equity is also important to want to continue to lend and provide help should you require additional working capital.

Will Current Economic Conditions Challenge Banks on Rural Lending?

1. Australian Domestic Banks overweight in retail lending

2. Farming businesses do well during economic downturns

The Benefits of Maintaining Wages for Family Members.

Cashflow Forecasting… Make it Rain.

Cash is king. However, there are times when cashflow can be affected by external influences. With the current commodity downturn (particular in the livestock industry), the team at SproutAg have been fielding a number of calls from clients wanting to discuss their cashflow and how best to structure it.

It’s important to keep cashflow at the forefront of your mind, and to consistently update your plans, particularly during times when your cashflow might be affected. It is normal for cashflow to fluctuate, and for cashflow forecasts to be updated as commodity trade and processes change.

With cashflow fluctuating across all industries, we encourage you to start reviewing your cashflow forecasts early. On top of this, we’ve noticed that processing times by banks has slowed down, and so we encourage you to keep ahead of the game by staying on top of your cashflow!

What do I need to Remember when Forecasting my Cashflow?

1. Cashflow forecasting is about the “Cash in the Bank” and the availability of cash being cash and/or lines of credit/ loans.
2. A cashflow forecast needs to be revisited on a regular basis, so it’s important that you have a rolling forecast in your business.
3. Cashflow is about forecasting cash, not accounting and tax net profits.
4. Starting your cashflow forecasting early is crucial to success. Start by looking towards the end of the next calendar year and the availability of cash/ lending limits that will be required.

Get some independent help with your cashflow forecast and call your SproutAg Advisor.

Livestock finance is a helpful way to buy stock to take advantage of a market when you may not have the cash flow on hand. This flexibility to purchase livestock at the right time is also an intelligent way to make decisions when needed to make your operation more profitable.

There are other benefits: livestock finance doesn’t require you to put up land as security. It won’t churn up your cash flow, and it’s usually has a fast turnaround to secure, allowing you to take advantage of conditions as they happen.

SproutAg has gotten to know just about all of Australia’s livestock finance lenders – the good and the bad – so we’ve been able to take a strong view of the whole marketplace. We’ve taken the view that livestock finance is more expensive than similar equipment financiers or banks. There are a few reasons for that; stock and station agents usually take an 8 to 15 per cent cut, dedicated livestock funders take around 11 to 15 per cent, plus you have breeder facilities (7 to 12 per cent) and trade finance (6 to 8 per cent).

With this in mind, we suggest you look out for these three factors, so you are getting the most from livestock finance.

1. Hidden Costs: Many livestock finance contracts can be confusing and don’t easily show the real interest rate and fees. Some financiers will charge capitalised interest, interest on interest, which drastically increases the actual interest rate. We’re happy to review contracts before you sign them.
2. What’s the actual cost: How a season pans out, or if livestock doesn’t gain weight as expected, you might find the repayment costs or the pay-back in the breeder facility makes the actual price of finance too high for it to be profitable.
3. Security: Many livestock financers use an additional security clause in the background of the agreement that, in essence, gives them the right to mortgage your land if you’re unable to repay the loan.

As you’d imagine, livestock financers come and go over the years, and they often change their rates and finance costs along with their unique requirements that you need to decipher. However, livestock finance can be an excellent way to improve the profitability of your farm. We recommend before taking out livestock finance, you do your homework, weigh up the benefits with the risks, and if in doubt, speak to an expert.

SproutAg are the experts in livestock finance. Get in touch today.

You might have chatted to other farmers about finance and wondered why they got a different rate from you even though you have many similarities between businesses. Or maybe you’re getting offered different loan terms between lenders even though you’re giving them the same info. It’s something we see regularly, and fortunately, we’re able to get excellent insights into why these inconsistencies happen through our relationship with lenders across Australia.

So why are lenders inconsistent? There are many factors that they look at; bank revenue and profitability KPIs, your equity in the farm, capacity to pay, management strategies and systems in place to ensure the business’s profitability.

Frustratingly, some inconsistency on the interest rate and whether you get a loan or not comes down to the risk appetite of the individual banker you are dealing with. A busy banker may assess your application simply on their view, it has been said that 20 per cent of Agribusiness Bankers write 100 percent of their Banks Business so if you happen to meet a Banker who is not part of the 20 percent you are likely to get a poor outcome. There are over 1000 Agribusiness Bankers across Australia in different organisations so you need to avoid the 800 that will likely give you a result that will be less than desirable.

Despite these influences, there are things you can do to place your farming business in the best possible place to get a loan at a competitive interest rate with the right structure.

1. Presentation is essential: A professional presentation with the bank is critical for a successful application. This includes submitting a well-thought-out and researched business plan, forecast, cash flows and that you operate with sound management and systems.
2. Get a second opinion: Bankers have different KPIs and profit goals to achieve, so if you get a result from one, visit others for a second opinion.
3. Check the market: As a rule of thumb, we suggest you test the market every three years to see if you can get a better rate or terms on your loan.

It’s also a good idea to take a long-term view of your farm and appreciate that it will change over time, so loan terms and rates will vary with those changes. Business banking is a people game, so you need to make sure you get the right advice when dealing with your local lender.

For further information, please speak to your SproutAg Advisor.

There is a lot involved in an Agribusiness loan application. You’ve got to prepare financial documents, pull together forecasts and show your farm can repay the debt. With our experience working with over 20 different lenders, we’ve understood these difficulties and, importantly, what makes the best impression.

This article provides tips and hints on the information you need to present to the bank to put you in a strong position. To get there, you need to provide information that falls under two categories; background and overview, and business performance and planning.

1. Background and Overview

As it sounds, this is the opportunity to give the lender a background and overview of the farm and provide information that falls under these subgroups.

Big picture of the farm

Look at this as the introduction to your business. Start with an overview; production, farm history, the length of your involvement and past growth. You should also include the ownership and trading structure of the farm, for example, a family trust.

Organisational structure

With the big picture documented, you’ll also need to provide an organisational chart that includes information on how long the farm has been operating, who does what within the business, include the names and ages of family members.

Layout what you’re asking for

Explain clearly how much you’d like to borrow and why you want the loan; for example, do you want to expand the farm?

If the farm business is split into different entities, you’ll need to explain which entity is borrowing the money.

2. Business Performance and Planning

In this section, this is where you outline the historical performance of the business and provide a forward plan to demonstrate the resilience of the operation.

Financial Reporting

Provide historical financial statements so you can show the performance of the farm in previous years. You’ll also need to explain losses if you hit a terrible season. It’s a good idea to provide the last three years of financial information and tax returns for all entities involved in the farm.

You’ll also want to hand over a three-year cash flow forecast along with your rationale and assumptions in coming up with the estimates. It’s best to lean on the conservative side with estimates on production.

It is good to give the bank an assets and liabilities report that includes everything connected to the farm and personally. All this information combined provides the bank with a solid understanding of the farm’s financial performance and any liabilities it is carrying.

Business Plan

A business plan works alongside your cash flow forecasts as it shows where you see the farm in three to five years. It articulates your goals for the business and will capture any plans to grow, venture into new production and who will be doing what.

Presentation is key to a successful application, so take the time to prepare documents and forecasts ahead of time and make sure they are in one location. When meeting the bank, you should ensure you look and act professionally.

We can’t guarantee this will get you a loan, but if you follow these suggestions, you put yourself in the firmest place for a yes.

If anything is unclear in your application, or if you want help pulling together your application, SproutAg is here to help.

Please speak to your SproutAg Advisor for further information