Edition 190: Friday March 23, 2007.

The Farmingshow Straggle Muster

Introduction To Off-Farm Investing

When deciding to invest farm profits, there are generally four main alternatives:
- Repayment of Debt, Farm Improvements, Acquisition of More Land or Off Farm Investment

On-farm investment must naturally be considered first and there are often sound financial reasons for directing profits back into the farm. It always makes good sense for people or businesses to invest in what they know best and there are often family and lifestyle reasons for improving the farm.

However investing back into the farm is not necessarily the best solution. For example:
- There is no point in embarking upon a capital expenditure programme if it results in over-capitalisation of the farm.
- Over-expenditure on the farm now, may mean that future retirement plans are compromised because of the lack of retirement capital.
- In keeping with the basic 'spread of risk' rule it does not make sense to have all your capital committed in the same area.
- Changes in overseas markets, the New Zealand economy, exchange rates, government legislation or the weather could adversely affect specific agricultural industries and seriously undermine the value of the farm asset.

Above all, the risks associated with "having all your eggs in one basket" should be taken seriously.

Business Planning for Primary Producers

To achieve desired goals, it will usually be necessary to get professional advice. An essential first step is to engage the services of an accountant who is familiar with and interested in the development of a business plan.

As a general rule, every plan should address the following issues:
- Accurately identify the objectives for the farm, the business and each of the members of your family or business;
- Ensure the farm enterprise has adequate cash reserves and a reliable line of credit;
- Project likely farm income over the next two to three years and beyond and provide a rigorous assessment of its reliability;
- Fully recognise any accumulated tax losses;
- Determine viable on-farm investment projects;
- Establish the amount of capital available for off-farm investment;
- Ensure the plan is fl exible enough to meet changing circumstances.

While the overall business plan should be co-ordinated by an accountant, the development of off-farm investment strategies should be done in conjunction with a professional investment advisor.

When evaluating on-farm investments it is often helpful to classify each alternative into one of the following categories:
1. Critical for Ongoing Operations
2. Improvements to output or cost reduction
3. New Opportunities

Obviously the critical investments must proceed. However, those in categories 2 and 3 should be fully analysed to determine the expected return from each alternative. These rates of return should be conservatively estimated and then compared with similarly conservative returns from off-farm investments. Particular weight should be given to the liquidity of the alternatives and the reliability of projected cash flows. Failing to look beyond the farm when investing surplus cash can mean missing valuable opportunities.

This situation can arise when there is:
- Lack of awareness of off-farm investment opportunities.
- Lack of confidence in the security of these opportunities.
- Lack of understanding of the taxation implications.
- Failure to establish a total business plan, which includes off-farm investment.

All these problems can be remedied. Some time and effort is required, together with help from competent professionals. The effort will be worthwhile because adoption of proper planning processes can be (and usually is) highly profitable.

The Off -Farm Investment Plan

A well-designed off-farm investment plan will help you:
- Better provide for your retirement
- Diversify Assets
- Meet major non-farm expenditures
- Improve Overall Liquidity

In times of prosperity, an investment plan is necessary to understand where cash surpluses can be best employed. Any decisions need to be taken within the context of a total plan. For example, often cash surpluses can be invested in a way that minimises exposure to future seasonal fluctuations and market downturns.

Off-Farm Investing and Planning for Retirement

One of the greatest issues facing primary producers is being able to cater properly for retirement. You may consider your farm as your retirement plan, but this can pose problems, particularly if the farm is to be passed on to your children. As retirement approaches, you may find yourself in a quandary.

You may be "asset rich but cash poor". You might also like the farm to stay with your family, but at the same time need enough capital to fund a reasonable lifestyle during retirement. Unfortunately, your family may not be able to afford to purchase the property without incurring prohibitive debt.

Retirement funding external to the farm lifts a considerable financial burden from the property as many farms are unable to support retired parents as well as the working generation.

Investing Effectively

A sound investment plan is essential, but it won't successfully build wealth if the investments chosen are poor. There is a vast array of investment options available to investors - many of which add more confusion than value.

It is important to remember that at the end of the day, real wealth is made from:
- Earning interest on money loaned to others.
- Owning part of a successful business by buying shares in them to provide dividend income and growth.
- Owning property, either directly (to receive rent and growth) or indirectly (via property trusts to receive dividends and growth).

Developing an effective investment portfolio from these alternatives requires a combination of common sense, good judgement and time to sort through the many alternatives available. It also takes a good understanding of your tolerance for risk, time horizon and objectives.

An investment advisor can help to structure a portfolio of investments that not only helps you to meet your financial objectives but also passes the "I can sleep at night" test - i.e. does not incur unnecessary risk.

Ongoing Professional Investment Advice

Like any successful business person you probably track your farm's performance against your strategy, fine-tune it for changes in your circumstances and adjust to threats and opportunities along the way. You should approach your investing in the same way.

As a successful primary producer you also understand that your business works best when you can focus on those tasks which generate more value in the core parts of your business.And in those areas where you might have less knowledge, you are not afraid to bring in specialist advisors.

If you are a busy person you might find it useful to engage professionals who will not only monitor your wealth accumulation and management process, but also help drive it for you, ensure you are financially well-organised and keep you on track for achieving your long-term goals.

The Role of An Investment Advisor

Much like a farm consultant, your personal investment advisor works alongside you to help you achieve your goals. In addition to providing investment advice, a professional investment advisor will work with you to:
- Understand what you want to achieve with your investments and how involved you wish to be in looking after your investments.
- Help you to clearly defi ne both your short and long-term goals.
- Help you to design the most appropriate investment strategy accounting for your objectives, your tolerance for risk, your time horizon and any constraints that are in place.
- Help you understand your investment options and offer you specific investment recommendations and opportunities based on your needs.
- Provide you with a familiar voice to express your interests and concerns regarding your investments.

Most importantly, your advisor is an experienced investment professional who you can trust to provide you with guidance and advice regarding your and your family's financial future.

ABOUT ABN AMRO Craigs
ABN AMRO Craigs is one of New Zealand's largest investment advisory firms. With a strong provincial presence we have offices and investment advisors in 13 locations from Whangarei to Invercargill and have supported the rural sector since the firm began in 1984.
FREEPHONE: 0800 272 442
WEBSITE: www.abnamrocraigs.com

And remember to get your lunchtime bite of farming every weekday afternoon from Noon to 1pm on a radio station near you:
Nation-wide on Newstalk ZB in Alexandra on 95.1FM, Ashburton on 873AM, Blenheim on 92.1FM, Gisborne on 945AM, Greymouth on 99.1FM, Oamaru on 1395AM, Queenstown on 89.6FM, Taupo on 95.9FM, Timaru on 1152AM, Tokoroa on 1413AM, Wairarapa on 846AM, Wanaka on 90.6FM and Wanganui on 1197AM.
Hokonui Gold in Southland and West Otago on 94.8FM
Radio Clutha in South Otago on 96.9FM
Central FM in Hawkes Bay on 93.5, 96.6 and 99.4FM.

Or visit our home on the web at farmingshow.com.