Unravelling the succession tangle

AUSTRALIAN agricultural succession is a growing, sector-wide problem with an increasing average age of producers and a declining number of enterprises.

The general decline in the sector suggests that there is a need for significant structural adjustment to achieve this essential succession.

The problem requires a considered response to industry succession that helps retiring farmers exit the industry and provides a sustainable longer term entry pathway for new or expanding farmers. It would be sensible if this strategy was applicable over more than one generation of farmers.

It is clear that there are many farms for sale at this time, either listed or not. It is also apparent that there are not nearly as many willing and/or able buyers. Some corporate/sovereign investors are active in the market still, but have a select criteria that they are looking for and this means there is a large portion of farm land that does not have a suitable buyer which has undermined the liquidity in the market.

The result is that older farmers are forced to stay on the land or meet the market in an increasingly depressed environment. The flow on effect of realising land devaluation this way is that it erodes asset values and equity for farmers who are not planning to leave the industry at this time and ramps up credit pressure on them. Bank credit policies for agriculture rely heavily on equity and loan security ratios that are manipulated by changing land values even when debt service capacity does not necessarily change.

Younger farmers who wish to enter or expand often do not have sufficient equity to sustainably acquire land. Industry aspirants who do not enjoy the benefit of adequate private financial backing will often engage in tenancy arrangements to establish a production enterprise. However there are problems in raising operating capital because these tenant farming models are largely unsupported by the banking sector who do not recognise this kind of private tenure as a bankable security.

As a result farmers now feel market pressure to shift away from holding land titles to more sensibly securing land tenure, but remain unsupported. The conversation about the separation of agricultural real estate and agricultural production enterprises has been bubbling now for decades. However, little has been done to give effect to the obvious shift that needs to happen to separate these two agricultural businesses.

There is compelling evidence that structural adjustment of agricultural tenancies is now necessary.

Throughout Australian agricultural history there has barely been a generation that has not been subject to some form of structural adjustment by both State and Federal Governments. Regardless of your view on Government intervention, it has shaped the industry to date. It is unlikely that the next generation of producers can achieve the necessary structural adjustment without assistance and it is ludicrous to suggest the Government has no role now when Government intervention has been deemed so essential previously.

The Australian Government/s (State, Federal or both) should enter the market and start buying farm land with a view to leasing it back to suitable young farmers. There are a range of reasons why they should do this, some of which are outlined below:

Agricultural land is a perpetual asset of the nation and in effect this generation only ever really borrows it from future generations, therefore there is a compelling justification to hold agricultural land in trust for future generations.

Typically, Australian land prices only reflect the value of one generation of tenure and so the perpetual value of agricultural production from the land is not reflected in the current asset market value.

If Governments buy back farms these assets sit on the balance sheet to offset the expenditure or any borrowing initiated to execute the purchases. Given support to agriculture is inevitable, it is a better fiscal strategy for Government to buy land than to simply pay producers to farm.

Historically, Crown Leases have been deemed to be bankable security, so Government owned land potentially underwrites agricultural tenancy for young farmers who should then be able to undertake long term and very stable tenancies, which they cannot currently do on a private ownership basis.

Government borrowing costs are significantly lower than commercial agriculture borrowing costs. As a result the Government could provide profitable lease tenure to provide a sound investment for taxpayers in agricultural land and still provide more affordable tenure for young farmers.

The timely intervention in the agricultural land market would provide a floor in the land price that would in turn stabilise the operating environment for existing land holders and potentially mitigate the risk perceived by banks in a depreciating agricultural land market. This is a critical step in averting a massive write down in the wealth of the agricultural sector particularly in the broadacre industries.

It is clear that foreign sovereign investors are seeking to underwrite their future food security and it is essential that Australian Governments recognise that the fundamentals that drive those investment decisions cannot be matched by Australian farmers. Therefore it is necessary to mitigate the investment pressure to provide suitable pathways for young farmers to enter the industry not only in this generation, but on an ongoing basis.

The Government has a better justification for interfering in agricultural production systems through vegetation laws, etc.... only if it mitigates either the cost of, or the inherent risk created by, the intervention. Buying and affordably leasing back farm land is a tangible and responsible way to mitigate cost and risk perpetually.

Government land purchases will create some liquidity in the farm land market and create some competition for assets that are otherwise stranded. This provides an exit strategy for older and perhaps less productive farmers that will in turn be replaced by more productive participants.

This proposal is only one strategy that potentially buys some time for Australian agriculture. I stress it is only one possible tool in a much needed arsenal to resolve the underlying problems that are impinging on long term agricultural viability.

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FarmOnline
Pete Mailler

Pete Mailler

is a farmer on the Qld/NSW border and a co-founder of the Country Party of Australia
Date: Newest first | Oldest first

READER COMMENTS

Freshy
31/05/2014 7:23:10 AM

Interesting idea and thoughts.... I think it is fraught with danger though. Farmers need to start working together in equity partnerships, joint ventures etc.....so these retiring farmers might have 40% equity in a company that buys the farm, allowing for a new generation to get a foothold under 'bankable' rules, the retiring farmer could be bought out over time or the income from the shareholding become a superannuation investment. The opportunities for change are huge, we need to look at how kiwi farmers are tackling the problem and start doing the same......
Cocky
31/05/2014 8:11:44 AM

All this ridiculous idea will do is make the already huge disconnect between farm gate prices and land values worse. If old blokes paid too much for land and can't get out then capitalism will see them go bankrupt to allow either a better/more cashed up or more conservative operator take over. If gov wants a fair playing field for Aussie's to farm their own land then ban foreign ownership, otherwise stop manipulating the system. My farms value has to drop by half to become economically viable against current farm gate returns, that will make me profitable again.
Ironbark
2/06/2014 9:22:10 AM

While I agree with the sentiment of this piece, being a young man who would dearly love to own my own farm, I fear the logic expressed here is deeply flawed. The electorate already see farmers as 'landed gentry' with their "snouts in the public trough" regardless of where the facts lie a plan like this will only inflame those attitudes. The real trouble begins the Labor/greens take power again and begin making unsustainable environmental and economical demands, farmers who live export will be in trouble and others will find themselves administering a private national park on subsistence wages.
GFA
2/06/2014 10:40:22 AM

I admire you for tackling this hoary chestnut Peter. You make a lot of good points for us to ponder. However, I feel a bigger issue that needs tackling first is the anomaly that farmers are forced to take fully deregulated prices for their produce sales while being forced to pay regulated costs for input and supply chain products and services. It is only fair and just that they be freed of this anomaly by some mechanism. That would increase farm gate profits and go along way towards paying off bank loans quicker and easier.
wtf
2/06/2014 11:09:39 AM

Love this article. First farm grants etc only distort the market. Foreign cash is dangerous, it reduces the economic viability of the rest of us, as there is no level playing field. I recently caught up with friends, a few had started succession planning, all were totally disillusioned and could see no opening for them in this industry. Govt and others need to act NOW, an industry is being lost. Farming involves skill you cannot learn overnight, what will it take for a govt to realise FARMERS ARE SPECIAL and we are only ever "9 meals away from anarchy"(Alfred Henry Lewis 1855-1914)
Burrs under my saddlePete Mailler is a farmer on the Queensland/NSW border. His perspective and opinions are borne from seeing more than one side of many problems in his various farm leadership roles and in wanting to ensure a future for his children in agriculture.

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