by Donald E Fraser
ARE NEW ZEALAND FARMERS REALLY WEALTHY?
Farmers, we are in the land business. It may not seem like it, but most New Zealand farmers are wealthy or potentially so, particularly if you compare them with their cousins in town.
Wealth is all about owning property and the business of farming is about owning land and managing livestock , whereby effective management of both property and livestock ensures you get the maximum return.
Many dairy farmers start out 50/50 sharemilking, then buy a small farm, then a bigger one. Those who are good managers expand their business faster, while a few others fall by the wayside because mismanagement or lack of knowledge.
Land is the basis of all wealth. Wealthy people generally own either a lot of shares in a business or a lot of real estate, or both. If you look up the rich list of New Zealand, most of the wealth has come through real estate. Farming is about real estate, and that will lead to wealth as long as farmers can keep debt levels realistic and serviced.
Land has the following virtues:
- Supply is limited - this has become increasingly evident as the demand has exceeded supply and availability of cheap farms have pushed the prices up.
- Everybody wants land, particularly in New Zealand.
- Land is easy to own freehold land in New Zealand, whereas in many countries around the world land is difficult to acquire and own.
- Farming is a tax deductible business - all your farm running costs and interest is tax deductible against your income.
- New Zealand land is in demand internationally.
- Gives you the “feel good” factor.
- Land is timeless – it passes from one generation to the next.
New Zealand has no borders with other countries and therefore very few land disputes. New Zealand is relatively politically stable and relatively free from corruption. These factors add to the value of our land in international terms. If you compare this to owning land in say Paraguay or Uruguay, then the issues are very evident.
Shares do not have the same advantages. In his book “Prophecy”, Robert Kiyosaki (author of “Rich Dad, Poor Dad”), he makes a thought provoking case for the possible collapse of the international sharemarket. His reasoning is that world governments, particularly the US Government, have encouraged people who do not own land to invest in the sharemarket. This is to provide a retirement income later. The problem with this is that one day all the baby-boomers start to retire around the same time and want to withdraw all their money at the same time. This could cause a rush on the sharemarket and a huge crash. Robert Kiyosaki predicts this will occur prior to 2025.
When a farmer invests in land, even though the price of farmland may fluctuate and product prices vary, the land stays in his possession is the backbone of his farming business. He is also able to mortgage this piece of land to purchase more property.
In my business industry field, it is clear that for those people who do not own land, finding the funding for them is very difficult. If you take a person who is leasing land, or a 50/50 sharemilker, it is very difficult to get funding for them, because the banks do not perceive that they have any real assets to mortgage against.
Using a comparison of a farmer with a person working in say a Government department, their possible position on completion of their working life could be as follows:
Government Department Worker:
House 450,000
Debt 100,000
______
Equity $350,000
Plus a share in a building (returning say 8%) $100,000
________
Total $450,000
Farmer:
Farm (producing 80,000 kg/ms x $40.00) 3,200,000
Stock 300,000
________
Equity $3,500,000
Less Debt - @ say $10.00 per kg - $800,000
________
Total $2,700,000
Figures above illustrate the farmers ends up with six times more cash equity compared to the Government Department worker.
Even allowing for the assumptions I had made above, there is still likely to be a considerable difference between the wealth of a farmer at retirement age and that of a salaried person who has retired from the workforce in town.
In summary, we as farmers are in the land business. It is the land that has made farmers wealthy and it is important to remember this when times are getting tougher. It is important to try and hold your land complement, rationalize your business and maintain your land asset, not only for your own life, but for future generations.
