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Commonly overlooked issues when acquiring the neighbour’s farm

When considering the purchase of a neighbour's farm, many farmers only take into account the cost of the land and maybe the stock. There are however many other issues which need to be considered, for example:
  • The cost of additional Dairy Company shares. Do you have to pay for them up front or in the following season?
  • Do you need to allow for additional seasonal finance to get you through until the cheques from your product sales start arriving?
  • What is the nutrient state of the soil? Does it require a soil test and do you need to allow for a one off fertiliser dressing to raise the nutrient levels?
    Will there be race connection costs?
  • Do water supplies need connecting, or is there a requirement for a new pump?
  • If it is a dairy farm, will you require extra staff and is the milking parlour big enough?
  • Can the effluent ponds accommodate the requirements of an additional 90 cows?
  • Are the higher debt levels incurred in order to purchase the new farm likely to put your existing farming enterprise at risk? You may be pushed into excessive debt levels if 100% finance is necessary to do the deal.
  • Is your desire to purchase the neighbour's property based 80% on emotion and 20% on logic? Are you willing to take advice so that your decision is based as it should be – 80% logic and 20% emotion?
  • Should the additional land be bought in a Family Trust and how does that fit with your existing ownership structure?
  • Can you sell off a spare house or house site to reduce the cost of the debt?
  • If there is no real estate agent involved, who is going to negotiate the deal and put the contract together?
  • Do your family agree with your decision?
We see many cases where secure farmers in a strong position get carried away and decide they want to purchase their neighbour's farm, right or wrong! By the time all the additional costs have been added up, they find themselves over-committed and life becomes one long struggle.

The following example gives an indication of some of the hidden costs. I have chosen a dairy farm as an example, but any other type of farm would be similar. I have used approximate rounded figures for simplicity.
New farm next door, 30 ha say @ $24,000/ha

$720,000



Shares **

$140,000



Total



$860,000

Cows, say 90 x $1,000 per cow (@ 300kg/ms)

$90,000



Race connection

$20,000



Tidying up and connecting fences

$5,000



Water supply connection and upgrade

$10,000



Six more sets of cups in the milking parlour

$30,000



Enlarge effluent pond

$10,000



Capital fertiliser because the nutrient was low

$30,000



Legal fees

$5,000



Trust formation

$2,000



Additional seasonal finance

$30,000



Total



$242,000

Total ingoing



$1,102,000


** Note: there are changes coming up which may affect the above calculation

This equates to some $40 per kg/ms.

The debt on the farm should be at an acceptable level, running from $12 to $17 of debt per kg/ms over all production from the total business. If you spread this debt across both your existing and new production what will it look like?

From the above calculation it is clear that to purchase the neighbour's farm at 100% finance, your existing debt needs to be quite low. After making such calculations, many farmers have been disappointed to find that they couldn't actually afford the additional farm.

It is extremely important that you do your due diligence and make sure you've done your homework. It is obvious that the final costs will far exceed the original thought that the purchase of the land and a few extra livestock was all that was required.

Summary

At a recent Rural Law Conference in Canterbury which I attended a key message to all professionals was to meet together with your client. Your financier, solicitor, accountant can together discuss what is best for your business. You can look carefully at all the issues with input from all your advisors to get the logical conclusion. And yes, it will cost money, but it's nothing compared to the cost if you get it wrong.


 

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