Invest to get ahead

Dairy farmers wanting to invest in opportunities off-farm have benefited from ark and Measure courses run by DairyNZ. Anne Lee spoke with Paul Bird to find out how dairy industry workers can get ahead financially without getting burnt.

Investment on and off-farm can help fast track progression, diversify risk or even create pathways for succession.

Whatever it’s for, investing your hard-earned cash into an asset should always be done with sound advice.

But there are a few fundamental checks and balances you can do when assessing a venture, no matter what it is, DairyNZ’s Paul Bird says. He’s been running Mark and Measure courses for many years and has seen farmers invest in a wide range of things including young stock, mixed-age cows, support land, houses in town, storage units, commercial property, additional sharemilking businesses, managed funds, KiwiSaver – you name it.

“What I usually say to them – and it may sound obvious – but do your homework, build your knowledge so you can do it well.

“If it’s rearing calves – learn how to do that well, if it’s owning a house in town to rent out – learn all you can about the market, about your responsibilities as a landlord.

“Understand the upsides and the downsides, so the risks.

“They might be purely financial – what happens if interest rates change, if returns don’t meet expectation, what might be the reasons returns would be lower, are they short term downsides you could ride out or could they be fatal?

“There could be other factors like finding out you actually don’t like being a landlord and renting out a house and it takes too much time and travel.

“Whatever it is, make sure you fully understand it and if you can get good at it before you invest.

“Some couples are great at doing up houses and love it whereas others aren’t.

“If it’s an equity partnership make sure you really know who you’re going into partnership with, that your values are aligned. Know the farm, it’s strengths and weaknesses and know the numbers.

“Do your due diligence well and get professional advice to interrogate the numbers properly and make sure business structures are set up well.”

Paul says building up livestock numbers has given many young farmers a good leg up, but there are multiple permutations to how this is done that will affect just how good the margin and equity growth is including whether they’re dairy or dairy/beef stock, whether they’re free or at a cost, the cost of rearing, where and how much grazing is.

It can boost annual equity growth but it doesn’t come without risk either – one death can impact a margin as can timing of sales in weather affected markets.

“Talk to others who have done it so you can learn from them.”

Partnering with others

Paul says many young farmers have made big progress and achieved farm ownership goals by investing in the intangibles such as their own reputations.

“There are a lot of creative ways people get into farm ownership and that can often include partnering with others but to make those connections you need to invest in yourself.

“Your reputation is a key asset and having a reputation as a hard worker, being honest and known for your integrity – people notice that.

“So, before you even think about what you might invest in there are a couple of key principles you need to think about first.

“First, be good at what you do, so be good at farming and learn all you can and be good at saving because you’re going to need that saved cash to get into any venture and kick start your progression.

“Second, when you’re looking at investing, think about what interests you, what you’re good at or work out how you can be good at it and execute on that.

“Think about whether investing in this area you’re interested in and good at will actually get you to where you want to go in the time you want to get there.”

DairyNZ has a decision making matrix Paul discusses with Mark and Measure course participants that can help when they’re assessing an opportunity. The first step is to develop a list of criteria required for the success of an opportunity.

They might include factors such as:

  • How the opportunity fits with your vision and long-term goals.
  • Enjoyment level.
  • Time involved – initially, on a day-to-day basis, at a management or strategic level, until returns are realised.
  • What are the investment returns, cash surplus, cash flow profile, capital gain?
  • Risk level.
  • Other people – does it need staff; will you be working with others or independently?
  • How does it match your strengths and weaknesses?

“People will have their own criteria and it’s important to give those criteria enough consideration,” he says.

The criteria are listed down the page with the options to be assessed listed across the top of the page.

In each box you put a ranking from 0 (poor fit) to 5 (best fit) to show how the option would fit or stack up for each of the criteria.

While adding up the rankings for each option can give a good picture of how they compare, some criteria may have a greater weighting than others so it’s important to assess the results carefully.

It’s still useful for one option because it gets you thinking about an opportunity based on the criteria that are important to you.

The next step can be to play it forward in your mind, picturing the scenarios that come with a preferred option.

Think short, medium and long term impacts and think about what your gut feel tells you as well.

It’s also important to understand how you get returns from any investment, Paul says.

“How easily can you get out and cash up if you want to? Are you locked in for a specified time?

“Getting out and timing that right can be crucial.”

Contract milkers build equity with houses

Joe and Danielle Kehely, pictured, are contract milking in Northland and have invested in two houses to help build their equity as well as have an asset they can borrow against for the next step in sharemilking.

Joe says he bought his first house at age 16 after saving a $35,000 deposit thanks to working hard after school and over weekends possum trapping, relief milking, rearing calves and spraying weeds.

The two-bedroom unit in Tauranga was worth $175,000 back then and by the next year had already lifted in value to $250,000. It turned out to be a great investment thanks to capital gains in the region and he and Danielle were able to buy a second house in Kaitaia. They’ll likely sell one and retain the other to borrow against for their next investment in cows.

Changes to the tax laws relating to rental housing have cost them about $15,000/year so this has a material effect on returns from owning investment property.“It’s something people have to be aware of when they’re looking at getting into buying a rental house,” Joe says.

The Mark and Measure course they completed this year has given them a lot more skills when it comes to analysing their next steps, particularly when it comes to scrutinising returns on investments and assets.

“The biggest thing is investing in your knowledge and building skills.”