Sentiment v Reality
In this real-life case study, RFCS WA’s Greg James shows how some careful analysis and a “helicopter view” gave clients a reality check that saved the farm for generations to come.
The Clayton* family farm was established over a century ago and was operated successfully for about 75 of those years. Several generations were brought up on the property and the family is well known in the district.
In the late 1980s the Claytons along with many other farmers suffered from a dramatic drop in wool and sheep prices, that made many producers uneconomic.
Cropping margins were also squeezed, but not as hard, so farmers who could focus on crops and increase their area under crop were better positioned. This is however a judgement easier to make in hindsight: the Claytons stayed with sheep.
One step forward, two steps back
Year by year, they had to increase their borrowings to stay afloat. Son Bob had to take full time work off-farm, when the property could not support him as well.
By the time Bob inherited the property, debt was at a critical stage. Compounding this, Bob knew that the years he had spent working off-farm meant he lacked needed farming experience. Nevertheless, he was determined not to be the one that “lost the farm”.
For about ten years Bob and his wife struggled with the debt. Every time they got a little ahead, along would come a poor season. They didn’t have the capital to run the farm efficiently, with new machinery, decent rams and sound agronomic information, and that made it harder to recover.
It felt to the Claytons like one step forward and two steps back. A downward spiral had begun.
The land was valuable but the cashflow was poor. The bank’s lending to valuation ratio (LVR) was OK but servicing the debt was a challenge. Eventually the bank asked the Claytons to reduce the debt.
They couldn’t achieve this through trading, but they did not want to sell. The bank relationship soured.
After two years the RFCS WA was asked to help.
RFCS WA review
Counsellor Greg James, a rough diamond with 40 years rural experience and a surprising string of academic qualifications in agriculture, finance, management and counselling, made a confidential visit to the Clayton farm.
Not one for beating about the bush, he:
- asked for the full story on what was important to the family, and
- prepared cashflow budgets for the next three years.
Saving the farm was set as the number one priority. The whole family agreed they wanted to retain the farm for future generations. They also wanted Bob and his wife to be able to retire with some cash in the next five years.
The helicopter view
Greg walked the Claytons through his interpretation of the proven RFCS WA business model, which he calls the “helicopter view”.
“The idea here was to obtain the business’s current financial situation and look at what was likely to happen over the near future,” Greg explains. “By having connected cashflows covering three years it was easy to input any enterprise changes and see the result. Also by understanding the client’s needs and values these could be looked at in line with the cashflows going forward.”
Greg also walked the Claytons through a SWOT analysis (Strengths, Weaknesses, Opportunities and Threats), which identified that Bob was a good sheep farmer and had off-farm professional skills, but his cropping skills were weak and the business was hampered by inadequate machinery and the size of the property. Opportunities lay in off farm work while the imminent, critical threat was the Bank not continuing finance.
Also noted was a modest share portfolio that was ear-marked for retirement income and had been excluded from sale consideration.
Using the model they evaluated a range of options, referring the projected outcomes back to the family’s goals. Some of the options were:
Continue with no change
To continue with no change to the enterprise and assuming a Bank would finance the operation, it was likely to take twenty profitable years to obtain a debt free status. And twenty profitable years in a row is unlikely. Not a viable option.
This could increase any profits if the seasons were kind, however a substantial capital expenditure would be needed and Bob by his own admission was not a good cropper. The increased borrowings alone would likely sink the business.
Obtain off farm income
Off farm income was possible but would affect the ongoing farming enterprise and would not be sufficient to placate the bank. What was earnt would probably be absorbed by home expenses.
Lease the farm
Leasing the property coupled with off farm income and a clearing sale, wouldn’t reduce debt enough to leave any funds for retirement. The debt would still take up to 20 years to repay.
It became obvious from the cashflows and the options above that the Claytons needed to reduce debt and get a secure income. After discussions, the family agreed on this and worked out a practical solution.
The farm included a high-quality but remote block that previously had been considered not for sale because of its quality. However, its distance made it hard to farm effectively, with problems shifting stock and machinery. It was a relatively small block and sought after by the neighbours.
It was decided to place it on the market at a premium. It sold within a week. The settlement reduced debt by 50%.
The remaining property was leased, except for 120ha around the homestead.
A clearing sale and sale of the majority of the sheep further reduced core debt by 20%
Bob found off-farm employment close to the property, so he could continue to live at home. A small sheep flock was retained to keep an interest in farming and obtain some extra income, especially while prices were high.
The balance of the core debt was refinanced over eight years with the farm lease easily covering interest and principal repayments. Day to day living was covered by off farm work and sheep income.
To put the Claytons in total control of the debt and the Bank, it was decided to focus over the next two years on reducing the debt to a point where the sale of the remaining sheep and the share portfolio could clear the whole debt. Then the Claytons would have the option to retire debt free and live on the lease income, or they could chose to continue to repay debt in an annual payment until retirement.
This solution allowed Bob to keep the majority of the farm and retire debt free within two years. Not a bad outcome compared with an imminent forced sale.
Greg attributes the family’s resolution and unity of purpose in implementing the plan to the clarity they got from the “helicopter view” of their situation.
“They’ve had a weight lifted after a lifetime of worry and are in a much better place mentally, physically and financially,” Greg observes. “They have retained their farm and their dignity and have money in the bank. I only wish they had acted earlier, they could have stressed less and been even better off”.
Find out more at rfcswa.com.au and contact a counsellor direct (go to Contact > Counsellors on the website) or phone 1800 612 004.
RFCS WA is operated by a not for profit community group and receives funding from both Federal and WA governments.
Services are free to farmers, foresters, fishers and small rural businesses servicing them, that are doing it tough.
Counsellors are country people, farmers and from farming families in the main, with skills, knowledge, experience and formal qualifications in business financial management.
* Names and some details in this real-life case study have been changed to preserve client confidentiality. All of RFCS WA’s client work is strictly confidential.
Media contact Mr Chris Wheatcroft (CEO of RFCS WA) 0448 773 331