Wealth creation in agriculture

This is a much talked about topic in the rural sector. Some understand it, and grow their assets rapidly, and some are left wondering what actually happened and why they missed out.

I recently read an article "what I didn't learn at school, but wish I had" by Jamie McIntyre, which inspired me to write this article. Many people avoid making money because they feel guilty. If you look at the numbers, the majority of people are poor.

Australian research has shown that at the age of 65, 96% of the population are dead, dead broke, on the pension or in need of family to support them, terrific isn't it?

The statistics are much the same for New Zealand. Only 4% will be financially independent, including 1% who will be rich.

Now its all about how you look at it. The beauty of farming is that you have two parts to your business, and you need to identify them very clearly in your mind.

There is the cashflow, which the income part of your business. This includes sale of milk to the dairy factory, stock, wool, crops etc. This cashflow is crucial to paying your bills, running the business and so on. It is particularly important as it will allow you to pay interest on loans, which are used to buy property.

Now property is the second part of your business. Property is the wealth creator, and the basis of all wealth. So what you are doing is using your cashflow business to build your property assets.

For example, I use Fraser Farm Finance and have used it as the cashflow part of my business for my property company. My property company now owns commercial, an orchard and a deer farm. The property portfolio is underpinned by the business.

You need to remember that cashflow is king, and that is very true. If you are in a business and you don't have cashflow you are in trouble.

If you have a lot of property and a lot of loans to service and your cashflow falters, then things can change rapidly and lenders can get grumpy. This is an area that Fraser Farm Finance works in also.

Now back to wealth creation, you need to get your cashflow business established or at the same time purchase property to build the asset. As soon as you have enough equity or can buy another property, use the existing property as security to enable you to move forward.

Importantly, you need to ensure that your cashflow business can service the new debt. Ordinarily if you go to the banks and they all say no, that is a fair indicator that you are outside realistic guidelines for borrowing.

When you own property, you should look to add value to it. How? By improving the property and increasing production. For example:
    If you purchase a 100,000 kg farm @ $35.00 per kg ms = $3,500,000
    You increase the production to 140,000 kg, and sell it for $34.00 per kg ms
    the sale price then is $4,760,000
    Showing a tax free gain of $1,260,000
Not bad for a country boy is it?

The other way to improve it might be to upgrade pastures, tidy up the dwelling, improve the access, etc.

I often talk about asset stripping farms. Now that might sound quite Auckland-like, but if you have spare houses or a piece of land that are not contributing to the income and not part of the cashflow business, you may be able to subdivide them off and sell them.

The proceeds could go to debt reduction, or increase land holdings of productive land as distinct from non-productive land.

In summary, we need to look at our business in farming in two parts. There is the cashflow business for our property company. We need to look at them separately and identify what makes each part work better, and how they are interlocked.

We need to create wealth in our property company so we can have a better life now and when we retire, aiming to be in the top 4% rather than being in amongst the 96% who are dead, dead broke or dependent on the state for a living.


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