Five investment moves for your Fonterra windfall | EP 83

When you get an unexpected windfall as a farmer, what should you actually do with it? Is it just another payout to roll back into the farm, or a rare opportunity to reset your financial position?

With many Fonterra farmers waking up this week to a significant lump sum in their accounts, we asked Forsyth Barr investment adviser Michael Raynes to unpack the key decisions farmers should be thinking about.

Michael walks through five options, ranging from reinvestment and debt reduction to diversification and long-term planning. It’s all about making smart calls now that you won’t regret in five years’ time.

A quick note: nothing discussed in this episode is personal financial advice — it’s general in nature. If you’re considering your own situation, we recommend speaking with a registered financial adviser.

Transcript

SPEAKER_01 0:07

Hi everybody and welcome back to the Federated Farmers Podcast. Fontera farmers are waking up to something pretty unusual this week. A large lump sum landing in their accounts, averaging around$400,000. The question is what do you do with it? Is this just another payout to roll into the business? Or is it a rare chance to reset your farm financially? How do you avoid looking back in five years from now and wishing you'd made different calls? Well, to help us think through the smartest way to approach this, we're joined by Forsyth Bar investment advisor Michael Rains. Just a quick note, as usual, anything like this where we're talking about investment or finances, nothing discussed in this podcast should be considered personal financial advice. It's general in nature. If you want personal advice, please seek out a registered financial advisor. Hey well, Michael, thank you for joining us again on the podcast. You're becoming a bit of a regular, thank you. What makes this Fontero capital return fundamentally different from, you know, just a strong milk payout?

SPEAKER_00 1:12

Thanks for having me on again, Ben. I suppose there's a there's a few things to um that come into play. Um I guess if you just think about the total size of the payout, you know, which is over$3 billion or about$400,000 per farm, um, you know, that's that's significant for farmers and it's significant for the New Zealand economy as a whole. So it's not chicken feed, and and I guess we think it deserves to be treated accordingly. Um, you know, the payment itself, it's quite distinct from the regular milk payout. Um, you know, your regular payout, it's income for farmers, subject to tax, and and it varies from year to year based on a range of factors. Um, and that payout ultimately is what fuels the operational and financial performance of dairy farms each and every day. By contrast, the the capital payment is a return of capital from Fonterra following the sale of the mainland assets, and farmers get it tax-free. So it is one off in nature and certainly shouldn't be looked at as any form of recurring income. And certainly there's huge value in the money itself. But I guess we think the real value comes from thoughtful planning about what this can do for farmers and their families, really.

SPEAKER_01 2:22

Are there any sort of big mistakes that you're concerned farmers might make in the the weeks, the first weeks or months that this payment uh lands?

SPEAKER_00 2:34

I suppose something that comes to mind really is you know, when you think about the size and significance of the payment that we've just talked about, um, you know, it's not giving due time and and cause to assess their options and and determine what ultimately is the best use of the funds for their farm, for their family and their futures. You know, farmers are required to hold a certain level of equity in the cooperative, and and typically the only opportunity to to liquidate is when they sell a farm. So it's unlikely we'll we'll see this kind of payment again in our lifetime. So, you know, it does it does represent a once-in-a-generation opportunity to use the payout strategically to position their farming businesses and their families for the future. And for some, you know, the instinct might be to put more capital back into the farm. Um, that could be the right call, uh, but that won't necessarily be the right thing for everyone. So I think it's important, you know, um, farmers don't simply treat this as an extra income to spend.

SPEAKER_01 3:32

Yeah, so I was gonna ask, you know, around mindset. Is there anything else um in terms of mindset that farmers should um be thinking about when they're approaching this payment? What's different?

SPEAKER_00 3:45

Well, I suppose um, you know, farmers have always had to and and and still need to take a long-term view around their farming operations because of the volatility that can impact their farming operations. So that's what certainly taking a strategic long-term mindset when thinking about this payment is certainly something that we would we would advocate. As I mentioned, it's not just extra income to spend, but it's you know, the average payout's$400,000. That's significant. Some will be significantly higher. So, you know, when you get a windfall of that size, um, it could be tempting to do many things, but I think the care is to sit back um and have a really good think about what the best use of those funds are.

SPEAKER_01 4:27

I remember hearing the beloved Mary Holm talking about if you receive an inheritance and she sort of you know said any kind of windfall, the first thing you should do is just take your time. Don't go out and spend that straight away. How long should farmers wait? You know, how long should they spend making a decision on how to use this money?

SPEAKER_00 4:48

I think the key message probably is not to rush. Explore your options and talk with your trusted advisors on the best use of funds. Um, you know, the old saying Rome wasn't built in a day, and farms are the same. You know, well-performing farms have taken decades of hard work, good decisions, and resilience to build. You know, that not always an overnight success story. So the right length of time will vary depending upon the options that are uh you know irrelevant to the different farming operations. But yeah, it's as I say, um, take your time and you'll be better off for it, no doubt.

SPEAKER_01 5:24

Okay, so let's get into talking about those options, Michael. First start, can you just give us a quick overview of the key options um you'd recommend farmers consider?

SPEAKER_00 5:38

Farmers do have a have a suite of options. Um, and I think it's important to say there's no one size fits all solution. What works well for one farming operation might be completely different from their neighbor. Um, because every farm's different. Um, you know, different goals, debt levels, uh, different structures and family plans. And and and of course, they can be in very different places in the in their farming journeys. So farmers should be discussing these options with, you know, I guess the people that they think of as their trusted advisors if they haven't already. And I guess if you break it down a step back, you know, um, I guess, you know, there's probably five different options we we can see that are really valid. Um, and these are in no particular order. So the first one would be um, you know, using this capital to um to reset the balance sheet, you know, perhaps pay down some structural debt, um, which builds more resilience into the balance sheet um and provides greater flexibility for for down the track should should things uh move about a bit. Um, there'll be some farmers who um also might need to put investment back into the farm. Um, that makes sense. It could have been delayed over over time, but there might be some immigration upgrades. There could be fencing that needs work, you know, different farm equipment. So, you know, that's that's another option. Um, and I think this this capital return is also an opportunity for farms to actually maintain appropriate cash buffers to you know to build some financial breathing room that helps them, you know, um manage through any short-term fluctuations and unexpected pressures. And we've certainly seen a few of those recently. Fourth option really is thinking about the next generation. Succession, succession planning is uh is obviously a pretty big topic when it comes to farmers, and it's a it's a big issue facing many farming families. So this payment certainly is uh is a good opportunity for farmers to ask how can this capital return support my long-term family goals? And and I think um the other option is is I think there's a strong case for many farmers to invest some capital off farm. Not because they lack confidence in the sector and what they're doing and their own abilities, but because you know they're already deeply invested in it. You know, the farm's income and value are closely tied to a concentrated set of factors outside of a farmer's control. You know, you think about commodity prices, whether interest rates, foreign exchange rates, you name it, but they can't influence those things. So when most of your wealth sits in one type of asset, one region or one industry, you know, that can leave you more exposed than you might realize. So that's where investing beyond the farm gate can really add value. And it's, you know, investing off farm isn't about replacing the farm. You know, it's about building another layer around it to complement, you know, that asset base and income streams.

SPEAKER_01 8:33

Let's spend a bit of time, I guess, stepping through those different options. So the first one you mentioned was um, you know, this is an opportunity for a balance sheet reset. So starting with debt, in what situations is paying down debt the smartest move for farmers? And on the flip side, when might it not be?

SPEAKER_00 8:53

It will depend on where you are on your journey and what your balance sheet currently looks like. You know, if you're in the early days, you've purchased a farm in recent years, um, you've had a couple of good payout years, but you know, that debt burden probably is um is still reasonable. So it might be um uh prudent to uh you know continue to build more equity into um into the farming operation. Um that's obviously gonna keep the bank happy. Um, you know, um you'll have covenants that you need to um adhere to. Uh and ultimately by building more equity into the business, you're going to reduce your interest costs to we know uh commodity prices, milk prices can be volatile, things like interest rates can change. Um so that just builds build a grades, it builds greater flexibility to work your way through different cycles and opportunities ultimately at the end of the day, too. And debt isn't necessarily a bad thing, uh, but too much debt probably is. And you know, we only have to go back three or four years ago when we had a big spike in interest rates here in in New Zealand uh coming out of the back of COVID to try and stamp out inflation. And you know, that flowed through very quickly. So, you know, um the world's in an interesting place. And um so I think you know, just being prudent around those debt levels makes a lot of sense.

SPEAKER_01 10:13

Is there such a thing as being too aggressive with debt reduction, Michael?

SPEAKER_00 10:18

It'll come back to individual circumstances at the end of the day. Um, certainly we do know um from talking with agribankers um over the last couple of years that, you know, uh dairy farmers in particular have been really focused on debt repayment. So they have been accelerating debt repayment already. So having a level of debt in your in your operations is healthy. Debt gives plenty of motivation and to get up and keep working and and uh maximizing what you're doing. But I mean, I think the message I would share there really is um uh making sure your debt doesn't control you, but you control your debt ultimately.

SPEAKER_01 10:56

If we move on to talking about uh farm investment, that obviously sounds attractive to a lot of farmers. Where where do you see that possibly going wrong, Michael?

SPEAKER_00 11:08

Well, I think the key about putting the capital back into the farm, like it is always and or should be always, is being selective. You know, ultimately, whatever you do, you want it to deliver productivity and efficiency gains for you. There should be strategic farm improvements and ultimately improve the value of a land. So, you know, there should be good alignment and consistency with, you know, your long-term uh farm strategy. So really it's about being disciplined with the allocation of capital when you're putting it back into the farm. And I suppose really it would be avoiding spending purely because the funds are available to do now.

SPEAKER_01 11:46

It does raise the question, Michael. You talked about um that whatever you do should be consistent with your long-term strategy. If you don't have a strategy, I suppose now's a good time to develop one.

SPEAKER_00 11:59

Absolutely. Yeah. You know, be it with your accountant, if you've got a farm advisor, uh, your local Fed farmers' reps, right? They're uh well placed. They see uh a wide range of uh farming operations around the place where they can perhaps provide some good benchmarking information around uh that kind of thing.

SPEAKER_01 12:18

So the next option you talked about uh for this capital return was building some financial breathing room in the business. How underdone is that on Kiwi Farms at the moment, Michael?

SPEAKER_00 12:32

Well, I think actually, uh to my point earlier, it's probably actually in a better place, in as good a place as it's been in recent years, because we know farmers have been accelerating debt repayment. Banks have been keen for them to do that. Um and look, they've they've done that. So I think actually they're probably in um in pretty good in a pretty good place. But you know, that's a that's a generalization. Um, there's always differences depending on on your operation and whatnot. But I think um, you know, right now it's better than it was a few years ago for sure.

SPEAKER_01 13:03

Michael, talk a bit about why that's important, why it's useful uh for farmers to have a bit of a buffer, you know, when when things don't go so well.

SPEAKER_00 13:13

Well, to your point, you know, um no two years farming are the same. You know, if I we only have to look back um you know five or six months. And we've we've seen quite a bit going on in the world, you know, in terms of um the milk price. We saw it towards the back end of last year. Um terror reduced their payout forecast, and then it's gone back up again within the last um month, six weeks. The other thing that's obviously front of mind for a lot of farmers uh of New Zealanders in general is the spikes in oil prices thanks to what's been going on in the Middle East. Um, that's obviously flowed through very quickly, and particularly on farms where you know diesel is commonly used in operations, and obviously diesel has spiked more than normal fuel, and then you have your your road user charges on top again. So you've got volatility there. Um so you know, the last month or so, the the numbers for the farm would look different than what they would have expected a few months ago. Um, and then the other thing I suppose is where are interest rates going from here? You know, we'd been expecting interest rates to um probably start to uh lift towards the end of the year. That might happen sooner because what uh the issues in the Middle East has caused is a pickup in prices. And if that stays around longer than expected, that you know, that'll feed through to inflation. Um so the Reserve Bank yesterday were very clear they're taking a uh let's see how this plays out, but they may have to act uh more decisively than uh they expected a while ago. The offset to that, of course, is uh what that impact is on economic growth. So, you know, those are just two real recent examples of um of movements um into the the revenue and cost lines of a farming operation that are beyond a farmer's control and can happen quite quickly. Uh and of course, you know, farmers have a couple of good years with the with the dairy payout. Um, that means there's increased provisional tax obligations likely to be coming up. So that's again, needs to be taken into account with cash flow. So, again, simple examples where, you know, just again making sure you control the balance sheet, not the other way around, and keeping that that financial breathing room on your side. Um, there's a good opportunity here to just bolster things if you need to.

SPEAKER_01 15:27

Moving on to the fourth option that you mentioned, which was around setting up the next generation. How can this money genuinely be used to shift the dial for succession or helping the next generation into farming?

SPEAKER_00 15:41

We could talk all day about succession. And uh it's a great topic. Um I suppose, you know, um, land is valuable, but it's not very liquid. So um it's hard to divide a farmer fairly when not everyone wants to farm or when one child's involved in the business and others aren't. So putting your capital into off-arm assets can help create options ultimately. Uh it gives pool uh gives families another pool of wealth to work with when thinking about fairness, retirement, intergenerational transfer, or supporting um the next generation in different ways. And ultimately it means um, you know, you're broadening out the family's asset base too, which can only be a good thing.

SPEAKER_01 16:28

Are there any traps to avoid when you're sort of trying to help the family out?

SPEAKER_00 16:33

I think the key is getting around the table, being open and honest about discussions, where things are at currently, people's motivations and intentions, uh, and taking your time. You know, ultimately you've got to commit to putting things down on paper as a pathway to making it happen. Um I think it's important to have someone in there who's respected by all parties as, let's call it uh, for want of a better phrase, a mediator, but someone who can keep the conversation on track. Um they're not emotionally invested into the farming operation, uh, but they can play a role in helping reach a position that ultimately is um fair and equitable for all. And and fairness and equity aren't always the same thing, but ultimately that's what you're trying to achieve.

SPEAKER_01 17:16

I'm not quite sure how to phrase this, but I was thinking about this idea of um using this return for you know farm succession. I guess there might be a tendency here for people to think that only applies if you've sort of got kids who are nearly, you know, or already running the farm, you know, working on the farm or that age, or um, or they're about to be that age. Do you think that's true or or should farmers with younger kids maybe think about this as well?

SPEAKER_00 17:46

Yeah, I think it's uh look, it is a good opportunity to um invest some capital off farm to broaden your asset base. And it's like planting an acorn, right? Ultimately, you're planting some seeds today that aren't going to bear fruit until many years down the track. But there's no doubt that the impact of investing over the long time is is through compounding returns, being invested through cycles and taking advantage of opportunities to like what is being presented right now to diversify. You know, farmers will look at diversifying their um their farming income streams. It could be through some agritourism venture or introducing a new line of um animal. This isn't this is no different. It's another tool in their toolbox, ultimately. You'll you'll find some people out there definitely thinking, right, this is an opportunity. Because as a Frontera shareholder, you know, you've had all your capital beholden, tied up in in this organization, and um you weren't necessarily foreseeing this coming back. So it's a you can actually reduce your reliance on um an exposure to um to this operation. Um, and I think that's something people should definitely consider.

SPEAKER_01 18:59

Yeah, so we've quite naturally moved from talking about succession to diversification. What are some simple uh realistic first steps into our farm investment?

SPEAKER_00 19:12

Well, I think um before we get to that, um exploring the why diversifying our farm makes a bit of sense. And you know, it's just sort of no two years of the same farming. Uh a good season could be followed by a dry one, uh, prices can turn, costs can rise faster than expected. So it's all part of the landscape they have to navigate and the risks they have to manage. So having money invested away from the farm can help balance some of those uncertainties. Um it means you know, you've got a part of your wealth working in areas that aren't directly tied to rainfall, stock prices, or the next payout, which can provide a buffer, obviously, when conditions on the farm are tougher and help smooth out some of those bumps. And and and the other thing, too, from a farming perspective, you know, you're donkey deep and NZ Inc. Um, so this allows you to, you know, allocate a portion of your wealth outside of New Zealand into international uh markets and take advantage of things that you simply can't invest into in New Zealand. So there's a there's a lot of good sense in that uh for New Zealand investors. So really uh, you know, thinking about you know, sort of where to start, what are the first steps? It would be looking to get some advice, some help, um, and and thinking about what's important to you. And this will differ depending upon you know where farmers are at. But you know, is this about building another source of capital? Uh, is it about generating income? Is it about that succession planning and catering for succession planning? So, you know, um Forsyth Bar, obviously, as specialist investment advisors, you know, would be pleased to chat with farmers who are thinking about what they should do and if investing beyond the farm gate is a is a reality for them. You know, we've got 26 branches across the country, over 200 plus advisors. And importantly, you know, we're um we've got a really good market presence in those regions where dairy, dairy are strong, the Waikato, the Taranaki, uh, Canterbury, et cetera. So we'd certainly welcome uh the opportunity to have a chat. And it comes back to getting to know your circumstances, your appetite for risk, and what you want out of it, because investing's personal at the end of the day. So we pride ourselves on building personal relationships with our clients. That ultimately means we can we can build portfolios that reflect their values and give them the best chance of achieving their long-term investing objectives.

SPEAKER_01 21:40

For most farmers, do you think that the the right move here, the smartest move, might actually be a combination of those options?

SPEAKER_00 21:49

Look, I think in all likelihood it probably is. It's a good time to do a little bit of everything in in many ways. What's right will depend upon each farming operation. Operation. But, you know, there's good cases to be made through for all of the different options that we talked about before. You know, there'll be some people there just happily to slash away a debt and bring it down. That's their focus, their mindset. Whereas for others, you know, they'll definitely see it as an opportunity to broaden their asset base, diversify, or farm. So really it's it's all about what makes sense for you. And uh the key thing is just sort of working, working through those options and uh in a measured way, really.

SPEAKER_01 22:29

If you had to prioritize, um, you know, is there an order that farmers should be thinking and should you start with debt?

SPEAKER_00 22:37

Oh, look, I think I'd be throwing a generalized comment out there. I think it will come back to personal circumstances of the farming entity and the families involved and what their what's important to them and what their goals are, uh, because ultimately decisions should align with that.

SPEAKER_01 22:53

Is this something that farmers, a lot of farmers could work out on their own, or would you recommend that everybody seeks advice? And is there a point at which it becomes risky not to get advice?

SPEAKER_00 23:04

I definitely think uh it's something that you should be chatting with uh your trusted advisors about for sure if you haven't already. I would think most farmers have actually had some conversations with other farmers or their accountants just based on conversations I have had. Um it's been a little while coming. Obviously, we've known about this payout coming uh for six months or so. So there's been a bit of time to think already. But now, you know, the payment's arriving any day now. So that means if you haven't started, it's not too late. But certainly uh, you know, make sure that you're fully aware of your options and what it could mean for you.

SPEAKER_01 23:43

Michael, like me, you've probably already heard uh about farmers already booking that trip to Raro in advance or you know, maybe getting a season ticket to watch the Chiefs or something. Um, is there some room here just to actually enjoy some of this money and enjoy life?

SPEAKER_00 23:58

Oh, completely. No doubt there'll be uh some new kitchens or bathrooms being ordered as well. But before making any decision, I think one thing that is important is it's critical to understand how your farming business is structured. Yes, the payment has been received tax-free, but it can have very different outcomes depending on whether you operate as a partnership, a company, or a trust. So understanding that structure, the sort of step one, and then running the numbers off the back of that. So that's where you know your accountant, you know, speak to them and they can uh make sure that what you're doing there isn't incurring further uh tax obligations.

SPEAKER_01 24:33

So, Michael, just to finish on a quick fire around on this topic of investing or any kind of financial advice, what's one thing that you think farmers should start doing, one thing they should stop doing, and one thing they should keep doing?

SPEAKER_00 24:49

Ooh, uh start doing. I mean, probably I'd say thinking like an investor. So regularly assessing the return on capital across stock, land use, equipment, you know, where is this dollar better spent? Is it in pasture? Is it stock debt reduction or farm investment? So just, you know, um, it's about long-term capital allocation, obviously. Um, and you know, doing that in a disciplined way over time, you know, does drive long-term wealth, not just production. Stop doing, probably avoiding that we've always done it this way, kind of thinking. Don't let tradition get in the way of financial decisions. And then keep doing, I think, um, is continuing to take that long-term, disciplined approach, you know, you know, focusing on stewardship of the land and sustainability that you know that underpins asset value, uh, discipline around cost control and your operations, uh, and continuing to invest in those relationships with the key people, your bankers, advisors, uh, and so on, and and you know, and your family members too. So farming, you know, is a generational business. So consistency, resilience, and and asset preservation are really important and key advantages.

SPEAKER_01 25:59

Great answers, Michael. I like those. Um, is there anything else you'd like to add before we wrap up?

SPEAKER_00 26:05

No, I just think hopefully, um, having got to the end of this, people um realize that um this is a once-in-a-generation opportunity to make some really good decisions from a long-term strategic perspective for the benefit of their farm and their families, future generations. And take the time, do the homework, and uh I'm sure you'll be rewarded uh in due course. Thanks again uh for the invite, Ben. It's been great chatting as always.

SPEAKER_01 26:33

Thanks, Michael. You're a legend. Appreciate it. Thanks for tuning in to today's episode. If you've enjoyed it and you'd like to hear more, subscribe to the Federated Farmers Podcast on Spotify, Apple, or wherever you listen to podcasts so that you get notified when our new episodes drop. And if you have any feedback or podcast suggestions, we'd love to hear from you. Please drop us a line podcast at fedfarm.org.nz. That's podcast at fedfarm.org.nz. Catch you next time.