The Press: Tuesday 27 March 2018

 

OPINION: If we only knew the absolute answer to the following question we would probably all be millionaires or at least safe in our retirement.

As always, predicting what lies in front of us is about as difficult as making money and keeping it.

The question I keep going back to is: What lies in front of us for agriculture and business?

We can have a reasonable inkling of what to expect over the next 10 years, but life always throws a few curve balls along the way.

The low interest and inflation rates over the past 10 years have camouflaged what our overall farm expenses would have been on a historical basis. We should work on both of these key figures increasing over the next few years. Your net farm profit needs to be at least 50 per cent higher than your personal drawings - anything less than this and over time we will end up relying on our bank managers more than is healthy.

If your spouse wants to work off-farm, don't fight it. If your a spouse earned about $30,000 gross off-farm that is the same net profit as you would earn from running another 1000 sheep stock units or milking another 90 cows or harvesting another 45 hectares of wheat. On that evidence I say run with the idea.

The price of food worldwide over the past 30 years has increased by a compound 2.6 per cent every year. The  Rule of 72 - divide 72 by the annual rate of return to get a rough estimate of how many years it will take for an initial investment to duplicate itself -  then tells us that the food price has doubled over 27.7 years. If this average compound figure was 4 per cent, then the food price would have doubled over 18 years. At 2 per cent, it would double every 36 years.

When you boil things down, agriculture is about management, costs, yield and price. Most of you are working your tails off with the first three, partly to offset the weak fourth factor which is price. We have been spending a fortune on irrigation and much of this has been to increase our yields to help cope with insufficient prices. This is a marginal economic approach.

Increasingly I am finding that sheep and beef and some cropping arrangements cannot justify irrigating the total area of their farms able to be irrigated simply because the cost/benefit analysis does not stack up. With some of the earlier irrigation schemes, this point does not apply, but we are talking about good schemes here put in at least 25 to 30 years ago.

What does a good Canterbury couple with some irrigation gross from different farming types per hectare? For dairying that would be about $8500-$9500/ha, cropping $3500-$4000/ha and sheep and beef $600-$900/ha.

So, what is the approximate farm working expenses to gross farm Income ratio for the three farm types? Interestingly, the ratio at present for all three is similar - somewhere in that 58 per cent to 63 per cent bracket.

 

 

We can count on our banks (almost 90 per cent owned by Australia) to start stress testing our New Zealand farm operations that they see as being under financial pressure or potential financial pressure. A starting point for any farming operation falling under the categories would be that they are paying every year about 35 per cent or more of their gross farm income in interest and rent and if their interest payment cover is less than about 1.25.

The bottom line is if you can't afford it, you can't afford it.

We can also bank on the retirement age becoming a point of debate. My view is that if we are still getting job satisfaction and our health is workable, why do we need to retire at 65 years of age? Getting 90 per cent job satisfaction is the key so don't retire early without a good reason. The fact is that 65 years is too early for many of us today to call it quits on the work front.  Many 65 year old men and women still have a ton of go in them and a ton of experience to make good decisions. The extra earnings will come in handy too.

How much income do a couple need if they want to both retire at 65 years of age? They should probably calculate on about twice their gross combined national superannuation before tax which is presently about $35,000. Broadly speaking, that is about $70,000 which after tax will come back to about $60,000. Break that down and it's about $5000 per month to cover everything - and I mean everything. Everyone will have a different figure here so my calculation is only a broad guide. Nonetheless, that extra $35,000 required would represent a pre-tax return on about $800,000 - $1 million invested.

That makes for sobering reading and it really is time that we all started thinking about what lies ahead for our farming futures.

Pita Alexander is an accountancy and agribusiness director at Alexanders.