Novel approach to farm succession challenge
Succession planning is a challenge faced by most farming families, but it is especially hard when land values are high.
‘Succession planning’ – two words that raise a diversity of emotions in all farming families.
While selecting varieties, keeping grass weeds at bay and tightening up the rotation are agronomic issues that challenge Dane Sommerville, it is trying to secure his family’s future that drives his business management.
Spalding, in the mid-north of South Australia, has good soil and reliable rainfall and the Sommervilles budget on yields of wheat and barley of three to four tonnes per hectare, about 1.8 tonnes/ha for canola and 6t/ha for oaten hay.
Consequently, land values are high, reaching $7000/ha for good cropping ground and $2000/ha for grazing country.
High land values make succession planning an even greater challenge.
“As the asset base of our family farm has rapidly increased over the past 10 years, succession planning has become increasingly difficult,” Dane says.
“The high value of the asset can increase expectations and this leads to extreme challenges in maintaining the asset base as a viable unit. With four generations now being supported by this property, at current returns it is hard to provide for everyone and have money left to buy out my three siblings,” he says.
To try to provide themselves with some security, Dane and his wife Natalie applied to lease 1052ha as a stand-alone business from the family farming property. But without capital they were unable to secure a bank loan to finance the venture.
They went in search of an alternative source of finance and found a private financial backer to support them and another couple who were interested in operating the business with them.
“We presented our case to these potential partners as if approaching the bank, so we had to have all our figures worked out to demonstrate the potential returns and risk involved,” Dane says.
The financial partner contributed the majority of the start-up capital needed for seed, fertiliser and chemicals so crops could be sown. Key pieces of equipment were purchased with mostly long-term finance. Other equipment was hired or services contracted. The cost of leasing the property was split evenly between the three parties.
Each partner established their own trust and each of these was a beneficiary of the joint business trust. All three parties used the same lawyers to set up these trusts, but each party sought independent advice. Each party used their own accountant.
Profits were divided between the partners, with the operating partners receiving slightly more than the financial partner.
Profits were distributed after interest and loan repayments. Most of the profits were reinvested into the business as working capital.
This arrangement was established in 2007 and the property was offered with a two-year lease with a right to renew. The lease was renewed for a further five years and in that time Dane and Natalie were able to buy out the operational and financial partner.
“This has been a great experience but we are exposed to considerable risk and were lucky to have either a run of good seasons or prices; frustratingly, hardly ever both in the same year.”
“I am pleased we took this step but would not do it again out of choice. It was satisfying to set up a business and secure independent finance away from the family farm. However, now that we have two children under five taking the big risks is more of a challenge.”
To gain economies of scale the leased block is now run operationally with the family farm. This has reduced the long-term security that Dane and Natalie wanted to achieve but has simplified management and allowed machinery to be consolidated over two businesses.
Dane and Natalie Sommerville
0417 825 037
For related GRDC resources see Ground Cover Direct.