Talking Dairy
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Talking Dairy
Money on the table: How to make it work for you | Ep. 112
With Fonterra’s sale of global consumer and associated businesses, Mainland Group, to Lactalis now approved, many shareholder farmers will soon receive a sizeable capital return, alongside strong milk prices. So, what’s the smartest move when opportunity knocks?
In this episode of Talking Dairy, Jac McGowan talks with financial commentator Martin Hawes and MBS Advisors director and rural accountant Nigel McWilliam about how to make confident, practical decisions that strengthen both your farm and your family’s future. From paying down debt to investing off-farm - or simply taking a well-earned break - they share grounded, no-nonsense advice on how to plan for the long term, reduce pressure, and make choices that fit your goals.
Thank you to Martin and Nigel for joining us on this episode. Find out more about them below:
Have feedback or ideas for future episodes? Email us at talkingdairy@dairynz.co.nz
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Kiora and welcome to Talking Dairy. I'm your host Jack McGowan from DairyNZ. It's great to have you with us. The decision is made and Fonterra's sale of its global consumer and associated businesses to Lactilis has been approved by shareholders. At the time of this recording, Fontera must decide how much of the proceeds will be returned to shareholders. It could be up to$2 per share, which equates to around$350,000 for the average farm. Combined with strong milk prices, this presents Fonterra shareholder farmers with a rare and exciting opportunity. But it also raises a question. Many have been pondering for some time. What will I do with it? With opportunity comes choice, and with choice, pressure. In this episode, we're exploring practical strategies to help you make confident, informed decisions. Joining me are Nigel McWilliam, Director and Rural Accountant from MBS Advisors, and Martin Hawes, one of New Zealand's most well-known financial authors and commentators. Now before we get started, we need a disclaimer. The content in this podcast includes general commentary and should not be considered investment advice. Certain transactions, such as those involving futures, options, and high yield securities, carry significant risks and may not be appropriate for all investors. We advise seeking independent legal or financial guidance before making any investment decisions. Tina Kurua and welcome Martin and Nigel. Now, Martin, you have recently retired from providing financial advice to clients, including farmers, and are now focused on writing and public speaking. How long did you practice as an advisor and how do you spend your time now?
SPEAKER_02:As a financial advisor, I think I practiced for about 20 years. I stepped down from that about four or five years ago. And now I'm concentrating on my writing and my speaking. So I do a weekly column and what's called Stuff Mastheads, and that's the main old stuff: newspapers, the press, the Waikapa Times, the Post. My column goes into the Southern Times and the Nelson Papers, and so they go quite widespread. So that's my big thing with writing. Although I've pretty much always got a book or two on the go over my career, 24 books. I will do the 25th in the coming months. And when that's done, I won't write more books. I do a lot of speaking work to seminars around the country. A lot of those are for Forsyth Bar, which is a big house, used to be a sharebroking firm, but they would call themselves financial advisors now. And I've done a lot of those for farmers because Forsyth Bar has a special relationship with federated farmers. I've done a lot through farming over the course of my life, born in Timor, and just about everybody had an ankle or something in a farming situation. When I was about 20, I left university. I was I was dying to go farming. But back in those days, I just couldn't see how I could find$100,000 to buy a farm. But um I can't wait through.
SPEAKER_00:So did you ever manage to buy a farm or you decided that wasn't for you?
SPEAKER_02:When I've got the money, I really wanted a high country farm and I could have afforded to buy one. I just couldn't in those days. I just couldn't see how I could manage all the losses because in those days Orino was so popular. High country farms were losing a lot of money, and I I couldn't see how I could keep it going.
SPEAKER_00:And Nigel, you grew up on a farm in Southland. You've been a rural banker and now an accountant based in the Waikato with many farming clients. Tell us a little bit more about your journey to where you've got to now.
SPEAKER_01:Yes, I'm from Tokenui, down in the deep Catlands, on a ship and beef farm down there, raised. And yeah, went through Lincoln and great university. His education opened my eyes from there, joined the rural bank. So ten years in banking and then overseas president. And then uh whether I saw the light or crossed to the dark side, not quite sure yet. But I jumped into the accounting stream and was very fortunate to be given an opportunity here in the Waikato. Kelly Dip Rose gave me that opportunity and I really thank him for that. That was twenty-three years ago with the brief to open an office in Morrisville. And uh we opened an office here with my PA twenty years ago, twenty-six staff with my fellow directors here. Basically grew the book from nothing to that scale by hard work and graft. During that time, I I've been involved with equity partnerships and dairy, seen the good, bad, and the ugly with that. As I said, I came to Morrisville 25 years ago. I was only going to be here for two years, but you meet good people and you stay, and that's exactly what I've done. And the Waikato is about 10 degrees warmer than Southend, so again, another good reason to stay.
SPEAKER_00:Nigel, let's start with what you're seeing on the ground. With the prospect of the capital return and high payouts, are farmers changing their spending habits for better or worse? And are they coming under pressure to spend their money from product and service providers who know their bank balances are looking strong?
SPEAKER_01:There's definitely more optimism out there. There are a lot of wise heads that have got the Frontier shares for a start. So they're not young farmers, uh people who've been around a while. They probably bought shares for$6 in the first place. So there's some pragmatism there and quite a bit of conservativism. And so they're looking at the balance sheet first. So balance sheet resilience is the key one, paying down debt against those shares, and then from there looking what actually makes the money in their business.
SPEAKER_00:Martin, when farmers get a lump sum like this, what's a good framework for deciding what to do with it?
SPEAKER_02:Really good question. And it's a tricky one because I could sit down with each and every farmer and I think I could come up with a solution for them. It's really a matrix of age, what they're thinking about in terms of succession, what might be burning on the farm to be fixed, in other words, you know, for a reinvestment back into the farm. Any thoughts of retirement? The final one would be when did the family last have a treat? Like, you know, trips like that. We might come back to that later, because I I do think that's a um uh an important one. So you've got this thing of age succession, how close to retirement are you? If you took a 58-year-old farmer, they would look at their options, and their options are basically to pay down some debt, maybe reinvest back into the farm, buy some piece of plant and equipment or uh stock or something, or invest off farm. And if you take that 58-year-old farmer, getting fairly close to retirement, that farmer might be best to invest off-farm, because off-farm investments are liquid, doesn't make the farm bigger. So if you invest in more plant and equipment and you've got one of the two all hoping to take the farm, the farm has just got a little bit bigger. Whereas with off-farm investments, it hasn't. And as I said before, the liquid. I think off-farm investments should be at the top of the list for that 58-year-old, because that family need to get familiar with portfolio investment because sooner or later, and it might be sooner, they are going to be doing that anyway. They're going to have another lump sum when they sell the farm or the child takes over. And they need familiarity with that.
SPEAKER_00:Under what conditions might a farmer of their age choose to invest on the farm instead?
SPEAKER_02:I think if there was something burning, one thing investing on farm, and I'm sure Nigel would be the same on this. I would be banging the table saying, tell me the return that this on-farm investment is going to make. Is it just a nice to have? And farmers are a canny lot, they you know, they don't tend to do this. I'd like a number. So what do your figures show that if you do this, you know, what additional return are you going to get? You could then take a younger farmer, somebody who's, say, 42, not really thinking about retirement at all, maybe purchased the farm not too long ago, carrying a fair bit of debt still. And I know farmers have got their debt down, but there'll be a few still who they might either pay off debt, which is a pretty simple thing to do, that might make the bank happy, or they might invest on farm and expect that to increase their return. I do think younger people need to concentrate their wealth to a particular thing, to be very good at that, but to try to grow that and make use of that to make them wealthy. As you get older, you need to diversify.
SPEAKER_00:And is it still true to say in farming that investing in capital repayments probably has the best return? Or is that not always true?
SPEAKER_02:It probably is mostly true, but then you've got to risk adjust that. Because you know, you're investing on farm, you're growing the amount of on-farm assets that you've got. That means you are putting more and more money on the red thread square. Now that's about the end of my gambling um analytics because I don't know much about gambling, but that they're putting more and more money into the same thing. There does come a time when you want, as a backstop, some money off farm. The other thing is I'm old enough to know and I've watched farming for long enough. Farming is a cyclical thing, and it always has been, it always will be. At the moment, they're enjoying really good times, and I hope they celebrate that and make the most of it. Because the next step, at some point, whether it's a year or whether it's five years or ten years, I don't know. But at some point it's going to turn down again. And those who have taken steps to future-proof themselves, they will be the winners when markets turn down and may well be able to. There's an old saying, buy and gloom, sell and boom. And so when things turn down, if you've got the wherewithal to buy the neighborhood.
SPEAKER_00:Nigel, let's talk about the farm itself. Capital expenditure and RM can be a bottomless bucket. You may want to improve the staff houses, put new milking facilities in, new farm buildings. If a farmer does want to invest back into their business, what's the best way for them to decide where that money goes?
SPEAKER_01:You try and look at for the like Martin said, uh, the return on investment, right? So straight away. Looking at what reduces stress and what will add value to the farm. But what we're looking at with our price, we're asking this question with the two dollars, have been for a long time. There's three buckets that we're looking at really. There's this putting money in the stability bucket, that's the balance sheet resilience piece, and also a rainy day fund because we've got a high advance right now. And if the payout should go down, there's going to be a not a lot of money for next winter. And that's when the$2 turns up, is actually April, May next year. And that might be really useful to actually use that as a working capital, as almost expensive for a little while. It is a balance sheet item at the end of the day, the return of capital. So we want to keep it on the balance sheet so it's there next year. So we either want to reduce debt or buy another asset effectively. But let me go back to that bucket analysis. We're looking at balance sheet resilience, and then we look at productivity as well. So it's investing in your infrastructure, as we talked about before, making sure that the capital spend actually reduces cost or reduces labor. And then right at the start of the discussion Martin talked about family, and that's the other part that we like to invest in is reward the people that have got you this far, put it that way. That may be a little bit of something that's just a reward for the tough years that they've had, and something they can touch when there's tough years ahead as well. That might be a new kitchen or a family holiday, or even supporting children to buy a house. This could be a deposit for a house for children, right? And it's ideal lump sum if you're talking$100,000 each for each of three children, put it that way. So that's what we're talking about right now.
SPEAKER_00:Nigel, are there any tax implications farmers need to be aware of with this capital return and and the high payout?
SPEAKER_01:There's no tax to worry about with the capital return. So it's a return of capital, it's a balance sheet item. It's tax free. So that lands has a tax-free return. So that's awesome. Obviously with payout, there is uh tax implications and obviously there's increased payout. But there's a opportunity here to use tools like income equalization where they can move this payout forward into another year, especially if they've used some of that share capital as a deposit on another farm where they've borrowed more debt. So they've got more debt going forward and they can actually push income now into that high debt year and then pay less tax on it. So there's some smart tactical timing planning that needs to be done as well.
SPEAKER_00:Obviously, they should be talking to their accountant about that.
SPEAKER_01:Yes. Talk to the accountant early about that. Yep.
SPEAKER_00:Martin, talk to us about diversification, how to do it well. You already mentioned sort of balancing the risk of investing in things you don't know about versus the risk of putting your eggs in one basket that you do know about.
SPEAKER_02:I've lived in New Zealand all my life. I'm a proud New Zealander. I couldn't live anywhere else. But I'm not going to put all my money here. We have a small, very brittle economy that could easily break. And the I hate to say this to a farmer group, but I'm going to say it anyway. That I think you need to imagine what would happen if New Zealand got foot and mouth disease. Foot and mouth disease, I think, would be the worst thing that could happen to New Zealand. Our currency would plummet. Any imported stuff that we could afford to buy anymore would be horrendously expensive. There'd be job losses all over the place. It would be an absolute disaster. There'd be no winners out of that, but the only people who would get through it well would be those who had money offshore, who had invested offshore. Now, I'm not asking and doing that sort of diversification for you to take less returns, because in fact, for the last 30-odd years, we've had this major tech boom going on. It's had various forms, and it's now largely in the AI form. But there have been some absolutely fabulous returns. If you look at Amazon, Amazon listed on the US share market 27 years ago. And if you had said to me 27 years ago, look, Amazon's listing, should I buy some shares, I would have said, well, it's a bookshop. Over that 27 years, Amazon has produced on average 33% per annum. Apple is about the same. Barkcha Hatterway, not even a tech company, is about 20%. So there have been some absolutely fabulous returns. Now that's for just the odd thing. I wouldn't be recommending that at all. I'd be recommending farmers to go to a financial advisor, get them to draw up a plan for how they should invest a certain amount of money and to have that diversified. It should be diversified across all of the asset classes. So it's got shares, it's got listed property that's commercial property that's listed on the share market, fixed interest investments, and some cash. It's got geographical diversification. It's all over the place. It's diversified by industries because technology is not just computers and so on. It's medical devices, it's biotech, it's clean tech. There's a whole range of different things that are going on in the world, which are really making very good money at the moment. Because only really two big off-farm investment questions. What amount of risk are you going to take? You know, are you going to be a balanced and so on? And who's going to manage it? About five or six years ago, I decided after 50 years of managing my own investments, not to manage them anymore. And it's really freed up my life. I'm getting older and I'm able, you know, I'm traveling at the moment. Yeah, I don't want to have to be watching what markets are doing and what my portfolio is doing and that sort of thing. So 99% of farmers, maybe 99.5% of farmers, ought to have somebody managing that money for them. They're busy enough with the farm. They need to concentrate on their big wealth-creating asset and let somebody else look after the stuff that they know about. I talked about familiarity before. There's a bit of a people make the sign of the cross and they shudder uh at handing their money over to somebody. Getting the feel of that with a relatively small amount of money is a very good idea before the farm gets sold and that relatively small becomes a really large amount of money. I'd be very keen for older farmers, particularly those who are well settled, to find a local financial advisor, somebody they trust with a firm that they know to get diversified.
SPEAKER_00:And obviously not trying to pick winners like Amazon ourselves.
SPEAKER_02:No, they'd be in the portfolio, but the farmers themselves probably shouldn't be doing it. They should be leaving that to somebody who knows about that. I don't do this anymore. I'm in Greece at the moment. There's somebody back in Christchurch who's just had a hard day looking after my portfolio. I hope he's enjoying a glass of wine. It's in the evening in New Zealand. But, you know, I just decided I don't have the time, effort, or energy to do everything.
SPEAKER_00:Nigel, what about using the capital return for land purchases or expansion? Cow prices are very expensive and land prices rising. Is now the right time for that kind of purchase?
SPEAKER_01:Expansion can still be right for the right operator at the right equity. Don't lose sight of the return on investment, of course. So I mean some of the bank's criteria are around, yes, it will support you to purchase land, but you also have to have a stock contract as well. So it's just maybe just having to buy those expensive stock right now is just a cost of the transaction, unfortunately. But that's just the way it is. It's just timing of business. So if you want that land, you're just going to have to do that and and make it work. But expansion isn't necessarily about hectares. It can be about growth on farm with regards to uh investing in feed systems or genetics and those sorts of things on farm. So uh getting bigger is not always better. It's about making sure you're not scaling your problem either, so making sure you're actually doing well on farm for a start. So you've got to make the farm purchase decision with all those other considerations, not simply because you've got a windfall that enables you to pay a deposit.
SPEAKER_00:Martin, you've said at the start, and actually a number of times, investing isn't just about money, it's about enjoying life and enjoying the journey. And it might be time for a reward for those farming families that work long hours and they're juggling workload and family time. What about using some of this for experiences like family holidays or trying to improve their balance in life? You've said that's a valid part of the plan. Tell us more.
SPEAKER_02:Yes, I would say this is more than just a reward. I think it's a reminder. You know, what is this all about? Why are you working 60 hours a week or whatever, risking all of your quite significant capital to run this farm? You're doing it ultimately for a better life for both of you and for the children as well. I uh, you know, I really like Nigel's about, you know, putting aside a deposit for each of the children. So you might put$50,000 into each of their KiwiSaver accounts, because they can only get that out to buy their first house. Can I just give a wee warning as well? This comes from years of experience, that you might decide to pay down debt secure in the knowledge that you could draw back down again if things got bad. When things get bad, banks usually um put a zipper over their lending. It gets very hard to borrow money. You might have four million dollars of debt at the moment, pay that down to three million dollars, hoping to pull that back out. If there was a major downturn again and you needed that money, you may not be able to pull it down because banks' lending criteria might be different.
SPEAKER_00:And so that's what you're talking about how shares are liquid in a way that perhaps your capital is no longer liquid once you've repaid it.
SPEAKER_02:Yes, the whole diversified portfolio is liquid. You can, you know, if you've done that with a financial advisor, you can pick up the phone and say, look, I need that money or I need a part of that money or whatever. The only thing, there's a little bit of hesitation there. You don't want to sell that while it's down. If there was a downturn in international markets, for example, at the same time as there was a downturn in dairy in New Zealand. Now that would be purely coincidence. You know, I don't think it's causative, but that could happen. You don't want to sell then if you don't absolutely have to.
SPEAKER_00:That's it for this episode of Talking Dairy. We've covered a lot today and hopefully given you some food for thought. A big takeaway for me is how important it is to start with your goals, both for your farm business and for your family. And as Martin said, seek advice from someone who understands your business and is aligned with your values, make decisions that feel right for your stage of life and business. Thanks so much to Nigel McWilliams and Martin Hawes for sharing their insights. We really appreciate it. Thank you for listening, and we'll catch you next time. Matiwa. If you'd like to get connected with DariNZ's latest advice, research, tools, and resources, whether it's reading, scrolling, listening, or in person, you can visit dairynz.co.nz forward slash get dash connected, and don't forget to hit follow to keep up to date with our latest episodes. As always, if you have any feedback on this podcast or have some ideas for future topics or guests, please email us at talkingdairy at dairynz.co.nz. Thanks for listening, and we'll catch you next time on Talking Dairy.