Farm Ownership & Succession 2021 - Part 2 -Country-Wide

A Country-Wide special publication

PART TWO

Farm Ownership & Succession 2021

There’s no time like the present to sort the future of your farm.

57% of kiwi farmers are considering succession planning.

Are you one of them?

Chat to one of our ASB Rural team today to see how we could help get your farm one step ahead for the future.

0800 787 252 ASB Rural Research, March 2021

asb.co.nz/rural ASB Bank Limited 56180 23594B 0621

Welcome

CONTENTS 4 Start now on your succession plan says

experienced consultant 6 Stamina required to last the marathon,

says expert adviser 8 Tips for growing equity from a young

manager couple who are on the

ownership ladder 12 Passive farm investments options offer

comfort without the slog 13 Ticking off the legals first - where your

lawyer fits in 14 Carbon offers chance for on-going

income for succession

to the second of our three-part series on farm succession produced by the team at Country-Wide with support from ASB. We’re continuing to examine farm ownership transition from all sides with advice from experts and case studies on farming families who are on the journey towards moving ownership of their business to the next generation.

Thanks for your feedback on the first part, published with the September issue of your CountryWide. Most of you were keen for more examples of farm succession.

Others were after more advice from experts from the legal, accounting or consultancy sector, to start them on their own journey.

Our future plan is to package up all the content published across the three parts and create a single digital publication that we can make available for you to download for yourself or share with friends and families.

Next month’s issue of CountryWide will contain the final part in our series, so the digital version will be available soon after.

Meantime keep the feedback coming and call 0800 224 782 if you want extra copies of the series sent out to you or members of your own family.

Tony Leggett Publisher, Country-Wide

COVER: Young managers Kurt and Lisa Portas have a start on building equity at Palliser Ridge Station in South Wairarapa. Find out more, page 8.

Photo: Rebecca Kempton.

Farm Ownership & Succession 2021 is produced by NZ Farm Life Media, publisher of Country-Wide and NZ Dairy Exporter.

Visit nzfarmlife.co.nz for details of how to subscribe to each magazine. Publisher: Tony Leggett, tony.leggett@nzfarmlife.co.nz, 027 4746 093.

Contributors: Tim Fulton, Phil Edmonds, Johnny Houston, Steve Wyn-Harris, Rebecca Kempton, Kate Taylor. Designer: Emily Rees.

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Start early on shared vision BY: TONY LEGGETT

E

xperienced succession adviser Sean Stafford regularly sees farming families divided over how to move farm ownership from one generation to the next.

Without a shared vision embraced by everyone from both generations, the lack of transparency inevitably creates tension and weakens the success of any future outcome.

Developing a shared vision needs to start early.

“Too many people trying to solve succession have put no thought into it until the point where it’s staring them in the face,” Stafford says.

The former rural bank manager says

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farmers need to start developing that long term vision on the day they go into business.

“If you actually have a vision where one of the objectives is to provide children with something at the end, the sooner you can start building your plan to achieve it, the better,” he says.

He believes farming families are increasingly moving away from the ‘fair is not always equal’ approach, where the oldest son gets the farm and other siblings receive less and wait for longer to get it.

“When I look into the old model for succession, I see an emphasis on a transaction that happens on a particular day in time, and I also see an uneven assigning of capital to ensure the farm stays in the family.”

“I’m pleased to say there is an increasing emphasis on equality, and that is reflective of

what is happening in society generally.”

Stafford says every situation is unique, but there are recurring key factors which he feels add to the likelihood of success.

Shared visions that include a focus on growing the capital base of the farming business should be a priority he says.

“If you have a growth strategy, either onfarm or off-farm, you have a much better platform for succession because you’re growing your business to the point where you can satisfy more than one sibling or in some cases, the whole family.”

Lack of capital growth is the biggest single issue preventing equitable succession outcomes, Stafford says.

He often meets farm owners who have left succession discussions with the wider family until they are close to retirement, when it’s

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‘I’M PLEASED TO SAY THERE IS AN INCREASING EMPHASIS ON EQUALITY, AND THAT IS REFLECTIVE OF WHAT IS HAPPENING IN SOCIETY GENERALLY.’

Sean Stafford is an advisor at rural accountancy and consultancy, MCI & Associates in Pahiatua, Tararua.

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too late to focus on growing the business.

“You end up with an asset that is barely supporting Mum and Dad, so the platform for succeeding to one child, let alone more children, is pretty limited.”

“My advice is to think of a vision as something that is worked on constantly, it should focus on growth and build an inter-generational trajectory. Everyone should be proactive,” he says.

When succession is handled as a gradual transition, daughters and sons are usually treated more equitably.

“I see a lot of examples where daughters are actually the successor, and not necessarily just in an active farming role. For some it’s more in governance and ownership roles.”

Succession discussions in the past often focused heavily on the operational side of the farm business but Stafford says it is more likely now to include more on the governance and ownership aspects.

He recently completed an ownership succession plan involving three siblings one brother who currently runs the farm business, and two sisters who live elsewhere.

Only one of the sisters can have children so the siblings decided to create a trust that owns the land and the beneficiary of the trust is the sister who can have children.

“The farm connects them all, brings them all together. They decided not to split the asset up and the farming brother isn’t letting his ego get in the way of a solution.”

Clarifying roles and responsibilities is starting to receive more emphasis. So is the identification of gaps in skills or experience, especially for the incoming person responsible for running the operational side of the farm business.

“This skill development doesn’t get enough time and effort in my view because ultimately professionals can’t earn fees off that space as easily as say, from a transaction.

“I want to see my clients avoid tension when the transaction does take place because we’ve spent the past 20 years preparing for it through a transition of roles and responsibility, and through growing the asset base to create options,” he says.

He is working with one family farming business where a 28-year-old son is the designated child to take over the business and Stafford is actively working on lifting his ‘CEO skill set’ so he’s ready in five years to run the business effectively and continue to grow it.

“If we do that well, the transaction will naturally fall out of that work and we’ll have a lot more fun.

“Dad gets to work with his son over a longer period of time, upskilling him and mentoring him, supported by a professional, and through that process he is better able to deal with the emotional side of handing over the farm in a few years’ time.”

When the ‘keys’ to the farm are just handed over to someone in the next generation on a particular transaction day in the future, it’s often a case of sink or swim and the farm business usually suffers a performance dip.

“Unless that individual is a very special person, the business will take a dive for a few years.”

He says the ‘sink or swim’ approach just adds unnecessary risk. In low-debt farming businesses where succession transactions are focused, Stafford says the business usually survives.

“But that’s only the case in some very unique intergenerational businesses where significant amounts of capital are being gifted to support the business. But where there are significant amounts of debt, the need to uplift performance is critical.”

Differences in sheep, beef and dairy Dairy farm businesses are more likely to be one or two generations ‘deep’ and focused more on running a profitable business than creating a legacy.

By comparison, adviser Sean Stafford says many of the sheep and beef farm owners he’s dealing with are the fourth or even fifth generation owners of the property, so extending that legacy is usually more important to them.

He sees growth-minded owners in both sectors but acknowledges dairy farming has historically offered more options

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when succession is being discussed, including share milking, contract milking, and leasing arrangements.

When working with his sheep and beef farmer clients, Stafford is increasingly encouraging them to separate the operational side of the farm business from the ownership of the land as a first step towards an ownership transition plan.

“Then we ask how we can use the operating entity to create opportunities for ownership transition for the future generation.”

“Step one is about building capability in the next CEO, then selling them a piece of the operational revenue. Stage three is talking about how we transition the ownership of the land.”

He knows of situations where a farming couple exit the operational side of the farm in their 50s, especially in well-established intergenerational businesses that are three-five generations deep. It gives the next generation an early start the operational and ownership but it often demands using the more outdated ‘fair is not always equal’ approach.

At the other extreme are 60-plus year-olds not ready to give up active farming. It’s become their life’s work, building a business often with scale, but they have forgone plenty over the years to achieve it.

“These are the owners who are just so passionate about farming. Even though they are well into their sixties, they are just not ready to give up.”

In these cases, you often have children in the business who don’t understand their father’s vision, they want to be a contributor but don’t see how they fit, and the principal doesn’t even see a problem because they are enjoying themselves so much.

“That is where coaching the incoming CEO is so critical, along with some hard questions,” Stafford says.

“That’s where you have to ask the incumbent farmer if they want to keep doing what they’re doing and throw the next generation under the bus, or do they want to start to step back, mentor the incoming CEO and have some fun?”

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Mandi McLeod: ‘In farming, families go into business together simply because they share DNA.’

Succession is a marathon, not a sprint BY: KATE TAYLOR

T

here is no one-size-fits-all solution for farm succession but it’s important to ask the right questions at the start of the process, farm business consultant Mandi McLeod says.

Many people start succession planning with someone with the hard skills of accounting or law, but they’re talking about structure, and not genuinely figuring out what the family wants, she says.

“People shouldn’t underestimate the emotional journey they will go on, but at the same time, they shouldn’t be afraid of it.

“The worst thing we can have is people going in with the best of intentions and failing because they don’t have the soft skills to deal with the social issues. None of

it works unless you understand the family dynamics before even looking at solutions.

If you haven’t dealt with individual family communication, it doesn’t matter how good the accounting or legal solutions are; they won’t keep your family intact.”

McLeod set up her own consultancy, Systems Insight Ltd, in 2002, which included work on farm/family business strategy, inter-generational transfer and governance coaching. Her 2009 Nuffield scholarship also concentrated on those issues.

“I’d realised two things: one was that succession was focused on asset transfer, pretty much at time of death, and there wasn’t a focus on transitioning management skills with succession. All the research was non-agricultural, non-rural; farm businesses had quite different needs that didn’t fit the

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BUILDING BETTER OUTCOMES Real communication Process driven Transparent management Accountability demanded Governance expected NO LEAKS

Leaky systems result in: • No process • No accountability • No governance

Family

Individual

“...NONE OF IT WORKS UNLESS YOU UNDERSTAND THE FAMILY DYNAMICS BEFORE EVEN LOOKING AT SOLUTIONS.”

box. When you’re on a farm, you don’t get to drive home after work. If you’re in another business and you employ family, they’re generally not living on the work site. You’re not looking into each other’s lives.”

She says there can be pressure on people who aren’t ready to abdicate power or control, and nothing will work until that happens.

“People who start successful family businesses are entrepreneurs and they get there because of power and control, so there’s a sense of loss of identity in giving that up. Then we have a generation of people who haven’t learnt patience. They want it now. But it takes time to work out what all family members want, and need, and expect from the family business.”

Both generations must be ready for the change.

“Mums and dads shouldn’t have to compromise their lifestyle for the second generation coming in, just to give them an opportunity. They have to be ready for a partner in the business and the successor

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Ownership

Ownership Family Management

has to have the necessary management skills or willingness to learn.”

McLeod bought into her parents’ 300-cow dairy farm in Waikato, but it was sold six years ago when she realised she couldn’t afford to expand or buy out her four siblings.

“I wanted my parents to have the life they earned, and it also gave them the opportunity to help other family members. We kept a third of the land, where they still live.”

Before that, McLeod says she had the triple whammy of living and breathing her own succession journey, researching with international colleagues to translate nonfarming succession stories into farming, while also working directly with farm businesses.

“It made me a bit unique, because my international colleagues were either running workshops or working in the academic field, they weren’t actually at the coalface of sitting with families and sometimes working through generations of trauma.”

Emphasis on the word, trauma.

“There are a number of family businesses where someone got the farm from gender or birthright. There were families where previous generations had not dealt well with succession so they had generations of family members not speaking to each other. I have knowledge of successors who had suicided or had breakdowns because they were put in positions of responsibility they were not equipped to deal with.”

She uses a diagram with interlocking

Business operations management

circles – family, management and ownership – to show the complexity of a family farming business. Traditionally they were viewed as discreet silos, but the greatest challenge lies when the three circles intercept, i.e. family members involved in management and ownership.

“Asking who needs to be where and what needs to be done to shift people through the different circles, while also acknowledging the emotional content. In a successful business, the lines on those circles are thick, but in a leaky circle, there’s no governance, no accountability.

“People need to ask, ‘Is that someone I would employ if they weren’t my son or daughter?’ or for the younger generations, ‘Would I work for them if they weren’t my parents?’ In farming, families go into business together simply because they share DNA.” People need process and a clear structure for introducing family members to a farming business, but she says many still want the end result without doing the work in the middle of the circles, which is communication.

“Genuinely understanding what family members want from the process; those expectations, more often than not, will derail the process if they haven’t been met, managed or mitigated. The equation should be for fair, rather than equal, and everyone being on the same page. Fair is sometimes equal but equal is very seldom fair.”

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ONFARM

Land stake ideal next step for young managers An innovative equity arrangement has allowed a young farm manager to achieve land ownership, Tony Leggett writes.

Photos: Rebecca Kempton.

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Left: Lisa and Kurt Portas share a wander with sons Axel and Beaden on Palliser Ridge, the 1500ha station they manage.

Below: Fencing off waterways and planting riparian strips is all part of the sustainability and biodiversity programme on Palliser Ridge.

P

alliser Ridge Station stands proud like a guiding beacon of sustainability overlooking the picturesque South Wairarapa coastline south-east of Pirinoa Village.

It’s not just the planting of thousands of native trees and immaculate infrastructure that feature on this 1500-hectare hill country property.

Its owners, board and staff all share a vision to build a multi-faceted, sustainable farming business, embracing opportunities that link together under the Palliser Ridge brand.

Growing up in Wellington, co-owner Jim Law always had a yearning for the land but spent 30-plus years working offshore, mostly as a senior executive in the oil industry.

When he returned to New Zealand several years ago with his wife Marilyn, it was time to fulfill his farming dream and he bought the original property, then added more.

Recognising the challenge of retaining good management staff to run the property and help lead further business growth, the Laws took the bold step of offering their young

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farm manager Kurt Portas and his wife Lisa an equity stake in a newly acquired, neighbouring block in 2013.

Kurt had been given the opportunity to take on day-to-day management of Palliser Ridge four years earlier at just 23 years old. Even for an ambitious Smedley graduate, it was earlier than he expected to step up to a management role.

He hadn’t long been employed on the station as a 2IC, but admits he made the decision to step up without too much thought.

“Jim approached me just before I was about to run out on the rugby field. All I could think about was the game that was about to start, so I just said ‘yep, that would be great’.”

Less than five years later, when the Laws offered Kurt and Lisa the chance to invest in the ownership of a 287ha neighbouring block that had come on the market, they were keen but like most young couples, cash-strapped.

To seal the deal, the Laws provided an interest-bearing loan so they could contribute 40% of the purchase price for the new block, now called Palliser Terraces. It is leased back to Palliser Ridge and the lease payments provide Kurt

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and Lisa with a dividend stream to help service the loan their employers provided.

Kurt says the ownership stake gives them the benefit of equity growth through any increase in land values while they work at repaying the loan principal and covering the interest.

The equity partnership with the Laws means they have a couple wanting to stay with them for a long period of time and be involved in the wider farm business.

“If you’ve got someone that’s here long term in the business who wants to help grow and build it, that is always going to be a more sustainable, better business,” Kurt says.

‘JIM APPROACHED ME JUST BEFORE I WAS ABOUT TO RUN OUT ON THE RUGBY FIELD. ALL I COULD THINK ABOUT WAS THE GAME THAT WAS ABOUT TO START, SO I JUST SAID ‘YEP, THAT WOULD BE GREAT’.’

Details of the ownership structure are covered by a Shareholders Agreement.

It sets out the term of the agreement, commitments and procedures plus any obligations between the parties.

In their case, in spite of the minority shareholding held by Kurt and Lisa, all decisions must be unanimous. If they want to exit the partnership before its term is up, they have to offer their shareholding back to the Laws first, and vice versa.

The partnership is also a vehicle for possible further acquisitions.

Four years on, Kurt and Lisa were invited to join the Palliser Ridge board as directors, so they have input on the wider strategic direction of the overall business.

Kurt manages a team of three farm staff and two cadets while Lisa leads the expansion of the businesses all linked to the Palliser Ridge brand, including a popular farm stay, events and an online shop selling wool blankets and knitting wools and lamb and beef all grown on the property.

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Another new fencing job completed. General farm hand, Bruce Wendon, manager Kurt Portas and shepherd Caleb Jones admire their work.

ADVICE FOR ASPIRING FARM OWNERS Successful farm manager Kurt Portas has some good advice to other young farmers keen to get a start in ownership.

Invest time in their local community, build a strong network and keep an open mind when opportunities come up.

“To any people that are looking to get into an equity stake in a farm, get amongst the community and help out and create a good name for yourself. People recognise that and it helps with future opportunities.”

His enjoyment of rugby has opened doors and created enduring relationships within the local community. Being prepared to put the hours into joining committees to run events or helping with local activities has paid dividends, often forming useful relationships that have led to grazing or

leasing opportunities.

“So, it’s just work hard, be a trustworthy person, get involved with a local sports club, community, local church or whatever. You’re not getting paid for it, it can feel like it’s a waste of time, but if people are watching and if you are committed to helping, people will pick up on that and opportunities will come,” he says.

Another positive aspect to his relationship with Palliser Ridge owner Jim Law is the generation gap between them.

“There’s a respect between us, I admire Jim and his wealth of knowledge and experience in business, and he in turn enjoys my passion for the business we’ve ended up developing together over the last 13 years.”

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Jumping across the balance sheet BY: CHRIS TENNENT-BROWN, ASB SENIOR WEALTH ECONOMIST

I

f you’ve spent your life working and building a profitable business in the primary sector, it’s likely your relationship with your bank has been tipped towards the debt side of your balance sheet.

Your bank has been there to help fund your investment plans, help with your cashflows, and help deal with the ups and downs of working off the land and selling your products on the world stage.

ASB Rural has a solid history of working with clients to help grow their business, whether it’s a sheep, beef, or dairy farm or a business in forestry or horticulture.

Regardless of which part of the primary sector your business is in, a succession plan for the future can involve a jump across the balance sheet as your relationship with your bank changes from helping you invest in your business to providing advice and helping to protect your assets.

This can be a significant change in mindset. In many cases, particularly in the rural sector, deciding how to invest the proceeds of a successful succession plan is your ‘what next?’.

The ASB Rural team works with clients by asking questions and getting them thinking about what a succession plan could look like for them and their business, then using our expertise and relationships to help make that happen.

As farmers ‘jump’ across the balance sheet following the sale of a farm or primary sector business, the family often winds up with significant funds that they want, and need, to get working hard to support them for the next phase of life.

Some of ASB’s best kept secrets are our skills in Private and Premium Banking, as well as investment management and insurance - helping hard-earned savings to grow, providing protection, and making everyday banking easier.

Private Banking is an exclusive service that offers the highest level of personalised banking. With this service, customers are assigned a dedicated private banker and associate who are on call to assist with any banking requirements. This could include

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Investment advice is available from the banking sector after a succession plan has been completed.

managing your private wealth, arranging home and investment loans, protecting your lifestyle and assets, and managing your everyday banking.

Our Premium Banking team is also responsible for helping our customers manage their portfolios. The main pillar of the Premium Banking proposition is a dedicated premium manager delivering

Chris TennentBrown.

personal solutions that meet your financial goals and needs via a quality financial review.

Similar to Private Banking, premium bankers provide access to specialist partners at ASB to help with all your banking requirements.

Working alongside our Private and Premium Banking teams, ASB has wealth managers (who are all Accredited Financial Advisers) across New Zealand. Wealth managers provide detailed personalised financial advice and tailored investment solutions to our customers. ASB also has insurance managers located throughout the country who can help ensure that you and your family have the right protection for what’s most important to you, particularly at times of significant change.

Succession is a big transition for all business owners, and it can be even more complicated for those in the primary sector when the business is more often than not also the family home. There’s no blueprint on how to transition from a farmer or business owner to the next stage in life because every situation is different.

The ASB Rural team has the dedication, experience, and the relationships into all parts of the bank to work with customers and help ensure a successful transition as you jump across the balance sheet, no matter how big or small that jump might be.

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Rural investment catering for long-term planning BY: PHIL EDMONDS

T

he current low interest rate environment is forcing everyone holding cash assets to sharpen their investment thinking. But for those facing a prospect of dividing assets, such as in a farm succession, being an active rather than a passive investor is becoming even more important.

There will be a cohort of farmers contemplating retiring and facing the prospect of paying almost 25% more for a house in town than they would have paid this time last year. And according to property analytics provider CoreLogic, if house prices

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continue to rise in line with the trend evident in the past three months, they’ll be 29% higher again next year. All this means there will potentially be a lot less available for farmers to invest elsewhere or distribute to the next generation from a farm sale.

The lesson of the house price explosion is that if you do have funds available, be prepared to act in your interests, and importantly, for those who will benefit from your actions.

Until relatively recently, farmers acting in their ‘interests’ has not been easy. Farmers have typically preferred to invest in what they know and understand, either other farms, or at least land-based food-producing assets.

This approach to investment is not unlike

New Zealanders in general, who love land above any other asset class. But buying farms has meant taking responsibility for every aspect of its value – the land itself and the farm business operation.

For farmers at or nearing the end of their careers and looking for avenues to retreat from farm work without abandoning farm ownership this wasn’t necessarily an attractive option. There has always been the possibility of bringing in a next generation family member as a sharemilker, for example, but this didn’t make the farm asset any more liquid to serve the interests of others, nor did it release capital required to fund a move off the farm.

Ross Verry, chief executive of private

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MyFarm’s Con Williams sees new succession opportunities where farmers stay involved in their farm property as part of a syndicate.

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capital market platform Syndex, says the good news is that for farmers who feel most comfortable contemplating investing in what they know and like, the opportunities are expanding and becoming more attractive.

“Farmland has definitely become more investible with lots of different structures now available to appeal to investors with different risk profiles.”

MyFarm general manager for investments Con Williams says MyFarm is looking again at partnerships in dairy and sees new succession opportunities where farmers stay involved in their farm property as part of a syndicate. If the syndicate is based on a land lease, it will receive a lease rate without the syndicate participants having to worry about any of the operation.

This type of ‘leased property’ structure fits with the conventional wisdom that retirees should look for steady or safer investments with a passive income which should be more reliable and free of management risks.

The syndicate model also presents opportunities to exit if your priorities change. Rather than needing to sell the farm, divesting proportional stakes can be enabled though the likes of Syndex markets.

The creation of investment products that bring more flexibility in the ownership of farm assets also offers opportunities for farmers to diversify their investments into ‘adjacent’ food producing assets.

Both Verry and Williams have seen strong interest among older farmers in syndicates owning horticulture, and particularly kiwifruit land and operations over the past couple of years.

Additionally, investment products are increasingly available to enable farmers to share in the growth potential of farm land development – something that in the past would have required investors to take a hands-on/boots-on role in realising that potential.

Verry notes that while farming may have become more complex, farm succession planning has in many ways become easier with far more options available. The desire for New Zealanders to own land has shown no signs of changing, and farmers can now more readily participate in that, earlier, rather than later.

What if things go wrong?

BY: KATE TAYLOR

B

eing the pessimist at the table is a role Waikato lawyer Sue Garmonsway doesn’t take lightly when helping a farming family in the middle of succession planning.

“People have to think about the ‘what if’ questions. Things can and do go wrong and the unexpected can crop up.”

Managing expectations can be hard and everyone’s perspectives need to be considered.

“For the person leaving the farm, it’s about ‘how much do I still want to earn as a living,’ and for the ones coming in, it’s a question of ‘what can I afford to pay?’ I’m like the pessimist in the equation. I come up with everything bad that could happen that could derail the outcome they want and force people to think about those what ifs – what if your marriage ends? What if you die unexpectedly? What if there’s a family falling out – these are all relevant to the succession equation.”

Some people are happy to take risks, and others want to mitigate every risk possible and don’t care what it costs, she says.

“There’s a fallacy around what it costs to do succession. You can pay X amount and do it properly now, or do it badly and cheaply and face possible litigation costs later. You’re better off to get in there and get talking about it.”

Garmonsway has extensive experience and knowledge in the area of rural law and agri-business succession. She has been working at the firm Gallie Miles for 17 years with mostly rural-based clients in the Te Awamutu and Otorohanga areas. She has two main pieces of advice: first, people should ask their professionals to work through succession planning together.

“What I think of as a fantastic plan may have disastrous tax implications, what your accountant thinks will work might not be legally robust, and what your accountant and lawyer come up with, the bank might

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‘When you look at the individual farm succession transactions in isolation, unless you have context, it’s really hard down the track to look into the reasons behind each decision made.’

Sue Garmonsway: Everyone’s perspectives need to be considered.

not finance, so it’s really important to have all those professionals involved at the outset to try to make a difficult process easier.”

Trusts add an extra level of complexity and were often drafted for specific reasons at a given moment in time, she says, but they are still a useful way to achieve succession. However the farming business is being operated, documentation such as wills and shareholder agreements will also need careful consideration.

“The second thing, one I can’t stress enough, is the need for a really well documented plan. A lawyer is crucial to that. When you look at the individual farm succession transactions in isolation, unless you have context, it’s really hard down the track to look into the reasons behind each decision made. Also if someone dies during the process, you need a legally enforceable document.”

Another issue is when a fair decision is made at one point in time, that sees one person get an asset with big increases in value over a longer period.

“The non-farming person doesn’t see the freedom they’ve had; they often just see the other person’s $5 million asset.”

Garmonsway tells the story of a good

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friend who had taken over a farm from his parents some years ago. The parents had transferred the farm to the client and allowed cash reserves of the same value to be left to the non-farming child. One lawyer acted for all parties, and it was difficult to subsequently work out why certain decisions had been made.

What followed was a protracted argument between the client and a family member after the farm substantially increased in value, leading the family member to believe they had received ‘less’ from mum and dad.

Garmonsway subsequently worked with the client’s family to transfer the farm to the next generation. With one child onfarm and several off-farm it was vital there was a clear Heads of Agreement or succession plan that recorded in writing the overall intentions of all parties.

“Making provision for mum and passing the farm on to the next generation in a way that takes the interests of everyone – both on and off farm – into account; I’m confident it is as robust as it can be for when Mum dies. Coming into a situation that was such a mess with a lot of cost and drama, to then help the family through, was satisfying.”

Following the tree line BY: PHIL EDMONDS

T

he conversion of farmland to forestry to capture carbon credits has become an unsettling development in rural communities, with concerns around whether forestry planting is in fact adhering to the promised ‘right tree in the right place’ strategy.

Unease about the threat to ‘productive’ land and the implications for existing rural communities is widespread. But forest owners have also been strident in defending the expansion of tree planting, in part, by drawing on the awkwardly irrefutable notion that farmers should not be told how to make economic decisions in their own interest.

And there’s a compelling case to suggest that, individually, farmers will benefit from forest planting, with those in the business of enabling this focusing squarely on it being a perfect solution to address farm succession.

Dryland Carbon was established to match its investor partners’ (including AirNZ, Contact Energy, Genesis Energy and Z Energy) need to source carbon offsets with farmers’ potential ability to provide them.

In order to achieve that, general manager Colin Jacobs says rather than buying land, Dryland Carbon works in partnership with existing landowners. Having identified suitable non-productive or ‘least’ productive land on a property, they undertake all the planting and deliver the landowner an annual cash payment akin to a lease for 16 years – aligned with the ETS determination of a forests’ average age. The landowner will then get a 50% share of the timber harvest and the land will be replanted with a new forest. In return, Dryland Carbon gets the carbon credits from the plantation.

Jacobs suggests it is tailor-made for farm succession – a diversified, and known annual revenue stream for 16 years, a timber asset at the end, a replanted forest, and what should equate to an overall increase in the

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value of the property.

NZ Carbon Farming, provides similar services, although it is dedicated to land ownership as well as leasing. It owns and leases nearly 90,000 hectares of forests.

Managing director Matt Walsh says NZ Carbon Farming’s lease solution is an ideal way for farmers to retain their land, get a better return off marginal land and benefit from the forest investment.

“Farmers can ring fence the ‘engine room’ of the farm – its most productive areas – for the next generation. In doing so, they can create less of a debt burden for their kids.

The passive income from a carbon lease can then help create an income stream for the current farmers to comfortably retire, helping enable the succession.”

Dryland Carbon’s Jacobs says there is also potential for farmers with forestry earning carbon credits to approach banks to reevaluate the overall value of the farm based on a new long-term revenue stream.

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“Banks have been nervous about investing in carbon credits, but the quality of our investors (some of NZ’s leading carbon emitters) means they should have more confidence to lend against it.” This may present further opportunities to invest on or off-farm to enable succession.

Jacobs says the emerging opportunity to capitalise on land that has typically generated low if any return means young farmers can more easily start their succession plan as soon as they take ownership. “It means looking at the whole farming system, and how it will develop over the long term. There will inevitably be areas that suit different uses whether it be horticulture, honey production, or forestry. We’re presenting one opportunity to help with that.”

One lingering thought farmers might have is, if the price of carbon continues to increase over the coming years, as is currently expected, why engage the likes of Dryland Carbon and NZ Carbon Farming, and

in so doing settle for a CPI-adjusted fixed annual cash payment, and a portion of the timber cheque at the end?

Matt Walsh says anyone looking to enter the carbon market on their own would need to do their homework.

“Working out what land is eligible is very technical. On average, 20% of trees planted are deemed by the Government to be ineligible to enter the ETS. Other issues to consider are the costs of establishing a new forest – and even getting access to the supply of trees required to plant successfully.”

Both providers stress their services eliminate risk for farmers by doing the research into the sites, ensuring they are ETS eligible, and developing best management practice for the particular site to maximise its potential returns.

Jacobs says that in any case, landowners should always seek good advice before making any moves.

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