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Lexis Nexis
Solutions for Knowledge–Driven Professionals
5th Annual Rural Professionals Conference
18 & 19 September 2008
Christchurch
PRACTICAL ISSUES FOR FARMERS AND THEIR ADVISORS
Don Fraser, Director, Fraser Farm Finance and Consulting
PRACTICAL ISSUES
SUCCESSION SIMPLIFIED
Under a Partnership it is all in one Pot
Selling the land and the shares to the Family Trust and keeping the livestock and the business in the partnership is the easiest concept to explain to farmers.
Family Trust
Cows and plant and beach house stay in the partnership and gives comfort to the owner.
This separates out the parts of the business and succeeding generations can understand it.
It may also give protection under the Matrimonial Property Act? It gets the client started in succession planning, which is paramount.
You can explain to them their asset position once the Trust is formed, i.e.
- The partnership owns the cows, plant, and a mortgage back to the family trust. Many farmers find it hard to part with the income side of the business, so the income remains in the partnership name.
- The Trust owns the farm and the shares.
- You can explain the percentage of income rental which they understand better. The succeeding son can take life cover on mum and dad. This will give him a lump sum to pay to his siblings.
- The cost of insurance is approximately 1% as compared to the cost of debt which is approximately 10%.
So this is all simple and easy for farmers to understand, they are the Settlors and the Trustees. The farmer wants to know they are still in control of their assets while they are alive.
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FAMILY MEETINGS
Family meetings generally include the client’s solicitor, accountant, financial advisor, banker, children if necessary and sometimes the insurance advisor.
Objectives
You need to discuss with your client the objectives of the meeting and why you think it is a good idea
If all people involved and working on your business are present:
- There are no letters going backwards and forwards between professional people.
- Everyone is then on the same page and this helps in resolving contentious issues.
- You can plan for the future, and get everything out in the open.
Agenda
The agenda is very important, and it needs to be circulated to everyone prior to the meeting.
The time and place, is important and it should be at a venue where everyone is going to feel comfortable.
Ease into the meeting with morning tea, and you will find time just flies.
Then lunch break becomes important and the time gives an opportunity for people to cool down and think about things.
Chairperson
You need a very good Chairperson, who knows the people and is able to manage what can be a challenging meeting.
Basic Agreements
Set out some basic agreements before starting the meeting. Examples might include:
- The Chairperson is to be respected, at all times.
- No blaming or shaming, no interrupting, ie the person speaking has the floor.
- It is discussion only, ie the spoken word does not equal an agreement or an implied agreement.
- All matters are confidential and remain within the walls of the meeting and within the family.
List Assets & Liabilities
Who owns what? This is a very good starting point and gets everybody involved. A whiteboard is really essential for this.
Things to Watch For
The quiet ones and make sure their opinion is asked for.
Bullying of partners.
I have seen someone being kicked so much under the table that the person actually moved away.
They sat somewhere else so they could discuss what they felt without being kicked by the partner.
There may be tears, anger and resentment, and a whole range of other emotions
Look for the things that are not said.
If someone gets up and leaves in a huff encourage them to leave and return in ten minutes. You can then restart the meeting when they return.
Results
The results of family meetings can be just amazing. Issues that have been grumbling away in the family for years can be resolved.
The meeting can improve inter-family relationships and it will give better clarity for everybody present.
The family is often stronger than we realise.
You can go into a meeting with the family and extended family members all grumpy, but after working through the issues you then find the family are all standing shoulder to shoulder.
Other Issues
Other issues that may be discussed are:
- Who are suitable Trustees; and
- Enduring Powers of Attorney etc.
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COW LEASING
Lease Value
Tends to be a lease fee 10% of value.
Replacements
If a cow dies it has to be replaced with an animal of similar age and BW. ie:100 cows leased out. 100 cows back.
Agreements can often include right of purchase at:
- pre-agreed price; or
- market value at the time.
Ownership
You need a letter from the owner of the cows signed by Lessee acknowledging that the ownership is retained by the owner.
A copy of this letter should go to the Lender. The ownership should also be noted on the LIC records.
Some Lessees have gone to the financiers and used the lease cows as collateral for security to obtain loans, which creates all sorts of problems later.
It is all about ownership of the cows.
Lease payments may be deducted from the milk cheques by Fonterra.
Invariably there is an argument around cow leasing agreements. Cow leasing is an area for cow swapping.
A simple cow leasing agreement needs to be between related parties leasing.
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COW SWAPPING
Cows have legs, and can easily be moved off the farm. It does not happen all the time, but it’s more common than you think.
A lot of this problem is about making money.
Cow swapping is apparently a bigger problem in Australia.
Tags
The following sets out how ear tags work:
Brass Cows should have a brass tag in one ear.
The brass tag shows the herd code, the year the cow was born and a sequential number.
Plastic Each cow should have a minder PVC tag in the other ear.
This is ex LIC and the tag is very difficult to remove.
Button There is also a button tag which is the Animal Health Board tag. It is yellow and it has the herd code. Stock should not be moved off the property without full animal identification tags in both ears.
DNA
DNA testing is becoming more common. It is now 100% reliable, and it is a lot cheaper than it was.
It was $45 per animal but now cost less. It is worth paying because of the big money that is paid for high BW cows.
Correct costs of DNA testing can be obtained from LIC.
Identification Ideas
Hold up a number when you purchase the cows and take a photo of the right hand side of every cow.
They all have different coat colours and you can usually tell by looking at them, ie, similar condition, similar size, similar tag placement and so on.
An amalgamated herd can usually be identified if the cows appear not to be in the same condition. This may require an experienced stockman to identify.
So how does it work? An example is as follows;
A client bought a farm as a going concern, land, shares and cows. He was a very good stockman.
At settlement date he immediately identified that they were not the cows he had bought.
The client found some bits of paper and old records in the cowshed and he tried to piece it together to make a claim.
The agent, LIC, and the vendor all went to ground. It was unresolved.
Amalgamated Herds
Light cows can be purchased in the autumn at the Morrinsville sale yards for approximately $700.
A lot of these are taken to the South Island. They are put together as herds and wintered together and possibly sold as a herd.
How can the public be misled?
The brass tag can be taken from the good existing herd and then put into the amalgamated herd and they then provide all the paperwork for the existing herd.
It all looks okay on paper.
I have a client who has bought an amalgamated herd and the cows are full of mastitis. He’s having a rapid test done at the moment, and is going to mediation to try to get it all sorted out.
The cows are then sold for approximately $2,000 per head. This can be a profit of $1,000 per cow after costs.
Therefore a 100 cow herd can realise a profit of $100,000.
Identification Time
This inspection should be done the day before possession. This is when you should check out everything and it is generally organised by the agent.
You can now reconfirm that the cows you have purchased are the cows that you will be taking possession of. Remember to take the photos!
BW
Often a farmer will take a high BW cow that has had a bull calf and put her high BW number with a poor producing heifer calf that is to be sold later.
Swapping has also happened in other industries, particularly the deer industry.
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GRAZING CONTRACTS
Most farmers have stock out to graze at some time during the year.
Written Agreement
Farmers do not always have a written agreement, and yet there should be as cows are worth thousands of dollars.
Cows are normally grazed out for 6-8 weeks over winter, and yearlings are generally grazed out for the whole year, so contracts are essential.
Good Husbandry
A good husbandry clause is essential in the contract and should set out the responsibilities of the grazier.
This may include: drenching, weighing, TB testing and weight gain.
Weight Gain
Some contracts have a specified weight gain with target live weights as per L.I.C. There are guidelines for different breeds and weight gains.
Compensation
If stock die from neglect who pays? If stock are starved what is the redress? An independent assessor, e.g. vet or consultant may be required to sort it all out.
If the owner of the stock does not pay the grazier he cannot withhold the animals in lieu of payment.
A client of mine had in-calf heifers come back so light that he has calved them down. He proposes to dry them off immediately and calve them down as 3 year olds.
All agreements need to give clear understanding and exit strategies.
Missing Stock
If stock are missing what is the redress for the owner?
Inspections
Many farmers never check their stock, only to find out too late they have lost condition.
Regular inspections are imperative and time frames for this should be written into the Grazing Contract.
Simple Grazing Contracts
You need simple and easy to understand contracts.
There are some shocking stories out there.
Federated Farmers can supply a contract.
Make sure a process is in place for disputes resolution if required.
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EMPLOYMENT AGREEMENTS
Many people have no employment agreements. Apparently some old employment agreements are still being used.
Employment issues are the most troublesome area for most farmers.
Some farmers expect staff to work as long and as hard as they did or do. Working 100 hours per week is not acceptable.
A $55,000 salary only equals $4 per hour for a 100 hour week.
Annualised hours, say 2,500 hours seems to be an improvement.
Liaise with your clients, and encourage them to do it properly.
Insist on an independent person to do quarterly reviews with the staff and the owners. This avoids blow outs and staff leaving in a huff.
Watch out for the employee’s partner because they can be the one who is not happy and firing the bullets. It is often the disgruntled partner that encourages the employee to leave the job.
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ALTERNATE DISPUTE RESOLUTION
By attending ‘Rural Professionals’ conferences it is easy to see that there are many areas for dispute in the rural sector.
Many disputes can be resolved quickly and relatively painlessly by getting the right people involved at the start. Some contracts state who is to be used if there is conflict.
My experience has identified the following:
- Get the parties to agree to agree before starting;
- Get right on to the problem immediately;
- In other words, don’t drag out the process;
- Encourage the clients not to take advice from all and sundry who may not understand or be qualified to give an opinion;
- Realise that farmers’ pride may be something that you need to deal with before getting a resolution;
- Realise that emotions will run high and need to be dealt with;
- That common sense is no longer that common;
- A quick resolution is best for all parties
Alternate dispute resolution has a real place in the rural sector. It is to be encouraged before often difficult and expensive litigation.
No Man is an Island
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FARM LEASING ISSUES
Registration of a lease is desirable, to protect both parties. Without registration the Lessee becomes an unsecured creditor.
Stocking Rate
The lease should state clearly the maximum and minimum number of stock. It might say:
“Not less than 200 cows and not more than 250 cows”
- On a dry stock property it might say:
- “Not less than 1,000 stock units and not more than 1,500 stock units”
- On vulnerable country it could state a lower winter stocking rate.
Fertiliser and Re-grassing
The district practice and generalisation is okay but I believe there should be a minimum fertiliser recommendation, which may be:
- Not less than 200kg per hectare of suitable phosphatic fertiliser.
- Not less than 1 tonne of lime per hectare within the five year period.
- A maximum of say 200kgs of nitrogen per hectare.
Some leases are far too general and need tightening up.
Leases can be easy to get into, but how do you get out? And what are the issues?
You really need a consultant to detail the information and Heads of Agreement and then give it to the solicitors to draw up the lease.
The consultant chosen should also do annual reviews.
I am seeing a lot of overstocked properties and there can then be SPCA and MAF issues.
Lease Term
Most Lessees say a three year lease is not long enough.
Year one - get property set up and get the feel of it
Year two - starting to get a bit of traction and make money
Year three - lease expires so they lose interest
A five year term is much more preferable.
Or 3 plus 2 years
Or 3 plus 3 years
Leasing vs 50/50 Sharemilking
The owner has a vested interest to make the business work with the 50/50 sharemilker.
With a fixed price lease there is no incentive for the Lessee to maintain or carry out improvements on the farm, particularly if it is a short term.
Stock Feed Left at Takeover
The amount of feed at takeover and the expiry of the lease should be the same. Some contract agreements miss the need for feed for the incoming Lessee.
It is imperative this information is in lease, and clearly set out.
Shutting up Pastures
There are two systems
1. A third – a third
A third shut up on 1st April
A third shut up on 1st May
2. Average Cover – twenty two hundred cover average of pasture.
Shutting the farm up on a third a third basis, is better if there is a drought. Dairying is about the amount of available feed on the property at takeover.
Specific Clauses
The agreement need to cover specific clauses carefully. The intention of lease may not be sufficient, especially when there is a dispute.
Getting a standard Lease Agreement and filling out the blank sections may not be in the best interest of both parties, particularly if there is a dispute.
Independent consultants and practical people should be used to assist with Heads of Agreement.
Compensation for Improvements
Many Lessees lease properties that need tidying up, and they spend money fixing the property.
When the Lessee vacates do they take improvements, or do improvements become the property of owner? The Lessee needs to look behind the lease and consider the quality of the owners ie: are they reasonable?
Is it in the owner’s interest to pay for improvements that are deemed capital?
Should they strike an agreement to pay 50% of costs?
Lessees are unable to see what needs fixing until actual possession is taken. There should be a simple clause for compensation for improvements of a capital nature.
It is all about Goodwill
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POSSIBLE CHECK LIST FOR FARMERS
- Is there a succession plan
- Do family members you employ have an employment agreement?
- Are the staff members you employ reviewed on a regular basis?
- Is there an up to date employment agreement?
- Is there a lease agreement for related parties between Trusts and partnerships?
- Is there an agreement when cows are leased?
- Is there a contract done when cows are grazed off the farm?
- Is there an agreement when land is leased from a third party?
- Are there current wills in place?
- Annual Meetings set up
- Enduring Powers of Attorney
If there is a Trust are there:
- Formal leases in place
- Suitable Trustees (in age and ability)
- Succeeding Trustees
- List of wishes
- Minutes kept from meetings
Related articles of interest:
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