Hi Shawn,
Firstly, I am a farmer, NOT A FINANCIAL PLANNER, so get independent advice –
not some one who gets a commission from the sale any product you may
purchase.
The following is not advice but based on my experience.
Land does not get any cheaper and they are not making any more of it,
especially if you are with in 2 hours of Melbourne.
You did not state your locality but having spent 6 years working in real
estate after the 70’s beef crash I learnt, and the lesson is still the same,
there are only 3 things that are important in real estate;
1. Position
2. Position
3. Position
What are the drivers of values in your area; who are the buyers at these
‘unreal prices’ and is the demand likely to continue?
Can you service the debt with a 10-15% drop in milk price?
Can you lock the interest rates in for 5 years?
If you cannot afford to buy this land, can you afford to keep what you
already have? It is worth the same money!
The land may go up 20% in the next 2 years; it may soften 10% then sit there
for 5 years then double– none of us have a crystal ball. One good thing
about farmers buying farming land is that it is an investment that you
understand. The downside is that if you have all your assets in the farm,
all ‘your eggs are in one basket’ and it can make estate planning difficult
to carve the assets up later on amongst the kids.
Think about what you can harvest in tonnes of DM/year, how much fertiliser,
seed and management will this DM cost you, add the interest and how does it
compare with purchased fodder or a lease block plus costs associated with
it?
Do your existing facilities allow you to milk more cows from this or other
land hence spreading the cost of your existing infrastructure over more Kgs
of milk solids OR would you need to make a large investment in
infrastructure to capture the benefit of the purchase adding to the cost?
If you can make the debt servicing stack up, the capital gains will keep
working for you over the long term further increasing your equity.
Do you have principal payments on your existing loans? If so, you may wish
to negotiate some of these as ‘interest only’ loans over 15 years so you can
repay some of your loans only if this is desirable.
Can you sleep at night or are you a ‘worrier’?
Some lenders have 2 way “break fees” – if you lock your interest rate for 5
years and you wish to repay some/all of this loan earlier, then if the
lender is disadvantaged by your early repayment (interest rates drop) then
you have to pay the difference between what they would have received if you
had continued with the loan HOWEVER, if interest rates go up, then the
lender pays you the difference as they can now lend these funds at a higher
rate.
Lenders are always looking for a strengthening balance sheet hence the
reason why they want you to make loan repayments. They often overlook the
fact that there are 2 ways to strengthen the balance sheet; the
aforementioned debt repayments OR grow the business so the loan stays the
same but the assets get bigger. Increasing stock numbers help your balance
sheet but be realistic and list your plant and equipment at REALISTIC
clearing sale values – not what the depreciation schedule in your tax return
says.
Other scenarios are to keep growing the assets and the debt or even sell the
lot!
Do not fall into the lender’s trap of ‘no fees if you stay with us for 5
years’ there is often a sting in the tail on ‘review’. Ask for the ‘annual
effective interest rate” with all the fees included
If you have a young family a healthy term insurance policy (not assurance
policy) to cover much of the debt so that if the #9 bus gets you the family
may have the assets relatively debt free is not a bad idea.
When buying life insurance (like you insure your car) the key issues are the
cost per $1000 of the cover, look at the rates in the policy for when you
are 20 years older as some start cheap and get very expensive, get them
indexed so you have the option every year to increase the cover with no
medical, make sure your spouse ‘owns’ the policy so the funds are not part
of your estate. You may wish to have similar or lesser cover for your spouse
depending what role they play in the business and what would be the business
impact of not having them.
Enough of my ramblings so good luck.
Cheers.
Max
Max Jelbart Consulting
+61 (0)3 5674 5529
Fax 5674 5584
Mob 0428 314 312
maxwellj@tpg.com.au
Trustee: Jelbart Dairy Pty Ltd
-----Original Message-----
From: Tanya Robbins [mailto:trobbins@westvic.com.au]
Sent: Friday, 14 July 2006 12:58 PM
To: Vicdairy-L
Subject: Growing the Business
With the rise in the value of dairy land in most areas recently I should
imagine many farming people find themselves with quite a bit more equity
than they had . In my area some of the smaller farms nearby have been listed
for sale with vendors who have high expectations ! In fact , a block next
door may come up next door to me and this begs the question- do you go
ahead and buy and expand the business or do something else , or do nothing ?
My figures and instinct tell me the timing is not right and I should wait
for the next downturn and some rising interest rates before buying . I
suppose it depends ....
Any comment ?
Shawn
This archive was generated by hypermail 2b29 : Tue Oct 24 2006 - 02:38:12 EST