- CHAPTER 4 - Case Study One
CHAPTER 4 - Case Study One
INTERVIEWEE The son alone.
4.1 FARM BACKGROUND
4.1.1 Farm Summary
A 106 ha factory supply dairy farm on border-dyke irrigated, silt loam soils, averaging 850mm annual rainfall and milking 300
The property was converted fully to dairying in 1981 when 140 cows were milked. It is now consolidating and building production, with 45,000kg of milkfat budgeted for the coming season.
Three hundred mixed age Jersey and Jersey Friesian cross cows mated to Jersey bulls by artificial insemination will be milked this season. Normally seventy replacement heifers are kept. All replacements and dry cows are wintered off.
Peak production to date has been 42,000kg of milk fat from 280 cows; 51,000kg could be achieved this season. Changes to allow this include higher nitrogen use, purchase of all supplements including silage, and no hay or straws bought. Any silage made on the farm will be for pasture control only.
4.1.2 Farm Purchase
The farm was originally purchased by the grandfather in 1925 for £12 per acre. The father took over ownership in 1961 and farmed sheep with cash crops. He built up to 70 cows by 1969 and in 1981 converted to straight dairy farming with 140 cows.
4.1.3 Current Market Value
| Current market value: say 45,000kgMF @ $22 | $990,000 | |
| Livestock | $288,000 | |
| Plant and machinery | $45,000 | |
| Total | $1,323,000 | |
| Term Liabilities | $520,600 | |
| Net Assets | $802,600 |
4.2 FAMILY DETAILS
4.2.1 Family Members
The Farmer, aged 32, has two sisters aged 40 and 38, both married and living off the farm. The father aged 69 and mother aged 63 retired to a nearby town in 1990.
4.2.2 Present Ownership Structure
The farm has been owned by the son as a sole trader since 1990, until then his parents farmed in partnership.
4.2.3 Retirement Plans of the Parents
The parents retired in 1990 and are now living in a nearby town.
Reasons for retirement included ill health and the desire to hand on the farm to the son as early as possible. The father works two or more days a week on the farm but has few other interests. The mother retired from a professional career when they moved from the farm.
4.2.4 Attitudes to Farm Succession
The father had felt handicapped by the grandfather who only handed on management control when father was aged 37 with a wife and children.
Priorities in managing the succession were to maintain a viable business and to hand over control of the farm to the son before he became "too old".
A smooth transition was seen as important to avoid ill feeling. The grandfather's estate had left a mortgage on the farm to the father and five brothers. The brothers wanted to recover the principal before it was due which caused ill feeling.
The son is now in full control and ownership but believes he has a moral debt to look after his parents if necessary. Much of the transfer was organised by the son from his Lincoln experience and training in farm succession.
4.3 FARM TRANSFER
4.3.1 The Process of Farm Transfer
1970's Son at high school and working on the farm at weekends.
1980 Son at Lincoln University studying agriculture returning home to work at weekends, vacations spent on other farms gaining practical experience.
1983 Son returned home, bought half share of land, stock and plant with an interest free mortgage to the parents. Farmed in partnership. Took over full management responsibilities.
from 1984 Parents gifted the debt on the half share owned by the son.
1990 Parents retired. Son purchased parents half share of land, buildings, plant and machinery. Parents left with $ 180,000 after mortgages were paid off plus their half share of the stock.
4.3.2 Provisions For Other Family Members
The two sisters are fully aware of the details of the transfer. Each will inherit half of the parents' estate, totalling $345,400 at present. Of this $220,400 is tied up in farm assets which would need to purchased by the farming son.
4.4 THE RETIRED FARMER
4.4.1 Assets and Liabilities
At retirement the parents took $180,000 from the sale of their share in the farm to the son and cashed in endowment life insurance policies.
$100,000 was used to purchase a debt free modern home. The insurance money was used to renovate the home, for an overseas trip and to purchase a campervan and car.
$80,000 was left in the farm at 8% interest only, now reduced to $70,000, generating $5,600 cash income per year.
They are fully eligible for National Superannuation.
The parents own 188 cows valued at $800 dollars totalling $150,400. These are farmed by the son with no rent or interest paid. They provide an option for the future either to generate income or capital by sale to the son.
They have no other significant investments or sources of income.
Their present income is seen by the son as sufficient for their day to day needs but not for overseas holidays or replacement of major items such as the car.
4.4.2 Summary of the Parents' Assets
| Home debt-free, say | $110,000 | |
| Vehicles | $ 15,000 | |
| Mortgage investment in farm | $ 70,000 | |
| 188 cows @ $800 | $150,400 | |
| TOTAL ASSETS | $345,400 |
4.4.3 Summary of Cash income
| Mortgage at 8% less tax at 24% | $ 4,256 | |
| National Super. at married rate post tax | $12,859 | |
| TOTAL INCOME | $17,115 |
The sale of their cows and investment at 8% would yield another $12,032 before tax and superannuation surcharge.
4.5 FARM VIABILITY UNDER NEW OWNERSHIP
4.5.1 Capital Structure
Assets
| Land & buildings | $990,000 |
| Plant and Machinery | $45,000 |
| Livestock | $288,000. |
| TOTAL | $1,323,000 |
Less Liabilities
| Mortgage to parents | $ 70,000 |
| Commercial mortgages | $300,000 |
| Value of parents stock | $150,400 |
| TOTAL | $520,400 |
| Net Assets | $802,600 (60%) |
4.5.2 Farm Cash Surplus
The 1994 forecast budget based on figures provided by the farmer shows a cash surplus after tax and drawings of $25,100.
A status quo budget with milk fat at $5.50 and production of 51,200 kg shows an after tax cash surplus available for personal expenses, to reward management and for profit of $48,271.
Debt servicing amounts to $66,900 or 20% of gross farm income.
4.6 ISSUES
Treatment of the daughters who inherit $177,000 each if the parents estate is not diminished, compared to the value of the farm two years after succession at $803,000.
The value, beyond the wages paid, of the work the son contributed over many years before he took over the farm, and his significant contribution to its present profitability.
The length of time required for planning a successful transfer of the farm.
The income of the parents in comparison to the potential net income from the farm.
4.7 SUMMARY AND CONCLUSIONS
The property is a 106 ha dairy farm worth in total $1,323,000.
The transfer of the farm was planned up to ten years in advance.
When the son returned home he purchased half the farm business with an interest free family loan and was gifted the principal over seven years.
On his parents' retirement he bought their half of the farm, plant and machinery using a commercial loan.
Succession of the son was successfully concluded with transfer of the ownership of assets now worth over $800,000 and retirement of the parents to town.
The parents have a debt free home, car and cash income of $17,115. They have the potential to liquidate their remaining investment and livestock to increase their living standard. They have an adequate standard of living.
The two daughters will inherit the parents' estate.
The farm is financially viable under its new ownership by the son with a possible surplus before drawings of $46,500, and with debt servicing of 20% of gross farm income.
SUMMARY OF CASE STUDY FARM ONE
| Farm Summary | 1994 Year |
Status Quo |
||||
| Type | Dairy | Dairy | ||||
| Total Area hectares | 106 |
106 |
||||
| Stock Units | 2458 |
2458 |
||||
| Milk Fat Price cents | 600 |
550 |
||||
| Milk Fat Production kg | 51200 |
51200 |
||||
| Current Market Value | 5990,000 |
5990.000 |
||||
| Livestock Value | 5288,000 |
$288,000 |
||||
| Plant & Machinery Value | $45,000 |
$45.000 |
||||
| Total Farm Capital | 51.323,000 |
$1,323.000 |
||||
| Revenue | ||||||
| Sheep Sales | ||||||
| Wool Sales | ||||||
| Cattle Sales | $47.830 |
$49,430 |
||||
| Deer Sales | ||||||
| Velvet Sales | ||||||
| Crop Sales | ||||||
| Milk Fat | 5270.312 |
$281,600 |
||||
| Less | ||||||
| Sheep Purchases | ||||||
| Cattle Purchases | $800 |
$800 |
||||
| Deer Purchases | ||||||
| Gross Farm %venue | $317,342 |
$330.230 |
||||
| Expenditure | ||||||
| Wages | $32,531 |
532.531 |
||||
| Animal Health | $10,278 |
$10,278 |
||||
| Crop Expenses | $0 |
so |
||||
| Electricity | $4.123 |
$4,123 |
||||
| Feed | $63,758 |
$63,758 |
||||
| Fertiliser | $27.798 |
$25,086 |
||||
| Seed | $700 |
$700 |
||||
| Freight | MW |
|||||
| Shed Expenses | $4.955 |
$4,955 |
||||
| Weed and Pest | $1,776 |
$1,776 |
||||
| Vehicles | $9.676 |
$9,676 |
||||
| Repairs & Maintenance | $15,000 |
$15,000 |
||||
| Administration | $13.197 |
$13,197 |
||||
| Other | $8,011 |
$8,011 |
||||
| Less Cash Farm Expenses | $192,603 |
$189.891 |
||||
| Equals Cash Farm Surplus | $124,739 |
$140.339 |
||||
| Drawings | $23.417 |
BELOW |
||||
| Tax (est) | $25,000 |
$17,914 |
||||
| Less Personal Expenditure | $48.417 |
$17,914 |
||||
| Principal | $5.196 |
$17,858 |
||||
| Interest | 536.026 |
$4.9.096 |
||||
| Less Debt Servicing | $41,222 |
$56,954 |
||||
| Development | $10,000 |
|||||
| Capital Purchases | $7,200 |
|||||
| Less Reinvestment | $10,000 |
$7,200 |
||||
| Equals 1994 Farm Profit | 525.100 |
|||||
| Equals Status Quo Surplus | $48,271 |
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| © MAF 1993 |  |
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