When Willie Falloon got a call from his parents 30 years ago asking him to come home from the South Island for a family meeting, he knew the news wouldn’t be good. The meeting was to be about the future of the family farm in the Wairarapa.
As the youngest of four siblings, Falloon had assumed he wouldn’t be the one to take over the farm, and back then he knew the business wasn’t making enough money to support him anyway.
As a result, Falloon had left home at 18 and headed for the South Island high country to make his own way in the farming world. By the time he was 21, he was offered a farm manager’s job; he was on his way. Then came the phone call.
He got home to find the bank was breathing down his parents’ necks, wanting to recoup debt. After government SMP (supplementary minimum price) subsidies were withdrawn in the mid-1980s, things had rapidly “turned to custard”.
“Dad lost three farms out of that. They just pulled the plug overnight instead of phasing it in, and it wiped out a whole generation of farmers.”
Falloon, now 51, recalls the round table meeting at home with his family, a lawyer and an accountant. The only way out, the gloomy discussion seemed to suggest, was to sell the farm.
But his father interjected and pointed at Falloon. He wanted his youngest son to take over the farm and save it. “He hadn’t even talked to me about it,” Falloon says today.
His own family’s story is one of the reasons Falloon will talk to anyone who will listen about the importance of early succession planning.
“It’s not an easy subject to raise and it’s tough to get it right,” he says. “But if you leave it too late, it gets harder.”
‘What’s your plan?’
Rotorua lawyer and farm succession planning expert Ian Blackman couldn’t agree more. “What’s your plan?” he asks farmers. If they say they don’t have one, he’ll tell them firmly, “Well, make one now.”
Blackman, now semi-retired, spent 25 years working in the rural sector and soon realised succession planning was a critical issue. More than 20 years ago he founded BlackmanSpargo Rural Law, specialising only in the rural sector, and set about resolving an issue that had either been ignored or mishandled for decades, forcing people to sell farms that had been in families for generations.
He advises farmers to make sure the mentors, accountants, bankers and lawyers they engage are rural specialists and know what they’re talking about.
A workable succession plan needs to achieve three things, Blackman says: succession for the child or children committed to taking over the farm; fairness to any non-succeeding children; and “emotional and financial” protection for the parents.
Watch out for trusts
Too many farming couples put their farmland into discretionary family trusts, thinking they are protecting their assets for successive generations, Blackman says.
It’s a move he describes as “incorrect and fatal” if the intention is to pass the farm to one child but still be fair to the other siblings. The problem is that ageing farming couples often don’t have a workable succession plan to go with the trust.
On the death of the last surviving parent, the sibling who intends to take over the farm is entitled only to an equal share of the land held in the trust. That inevitably leads to the farm having to be sold to meet the expectations and legal entitlement of the other beneficiaries (the siblings). And if too many family members in future generations end up with a share, the farm can’t progress.
“That is not a succession plan,” says Blackman. “It is a plan designed to ensure that the farm will be sold.”
The lawyer was asked to speak on the subject at seminars throughout New Zealand this year by the organisation Smash NZ (Smaller Milk and Supply Herds). He says around half of those who attended were middle-aged and older farmers, and about half of all attendees had their land in family trusts.
Blackman also warns wills are not failsafe either because they can be legally challenged, particularly if the will stipulates something different from that which has been verbally promised.
Law reports are packed full of disputes involving farming families, Blackman says, many of which result in the farm being sold and family members not speaking to each other.
“This is a sad legacy to leave.”
Keeping farming in the family
After witnessing repeated examples of poor succession planning, Blackman wrote a book, Keeping Farming in the Family: A guide to farm succession, to help explain the complexities of transferring farms to the next generation.
It’s a concise guide, illustrated by cartoonist and illustrator Malcolm Evans, giving examples of failed succession planning and explaining trusts, life-interest wills, companies, tax implications, a memorandum of wishes, the importance of skilled advisers, protection against marriage break-ups and good succession planning.
That planning needs to start long before the death of the parents who own the farm, Blackman says.
“The financial and emotional costs of getting it wrong are enormous.”
Future-proofing the family farm
Blackman favours a combination of a limited liability company, which owns the land, plant and livestock, and a family trust that owns the shares in that company.
“Trusts are not designed for trading,” he says. “They are designed specifically to protect assets through successive generations. That’s their history.”
Companies, on the other hand, are designed for trading and for business, he says.
One option is that the successor – who will be taking over the farm – gradually buys shares from the family trust, ideally over a long time. The parents, or surviving parent, get a comfortable income and the trust can earn dividends.
In a perfect world, when the last parent dies, the successor already owns all the shares. But if not, the parents need to have prepared a memorandum of wishes, directing that on the death of the remaining parent, the balance of the shares in the company will be sold to the successor.
Saving the family farm
Falloon was faced with a daunting task when he returned to the family farm — 500 hectares, with beef cattle and sheep — 30 years ago. He worked around the district for wages for two years, taking nothing from the farm. Eventually, it was profitable enough for him to set up a leasing arrangement with his parents, which gave them an income and enough to service the debt. Now he’s a fan of leasing arrangements.
Leasing enables people to get a taste of farming, work hard to get good production, run their own business and own their decisions, Falloon says.
“If you’re leasing a farm and you make a poor decision and lose a truckload of money, it doesn’t affect the family. It’s you that wears it.”
And farmers can make good money, he says. By that, he means an 18 to 20 per cent return on capital — livestock and plant — without having to fork out big money up-front to buy a farm.
Falloon and wife Angela were eventually able to borrow enough money to buy the family farm, enabling Falloon’s parents to live a comfortable retirement and help out his other siblings.
If they had been forced to sell the debt-laden property 30 years ago, Falloon doubts there would have been enough money left to buy them a home. He now owns several farms and is a joint investor in a different business leasing model.
He also leases a 1800ha farm in the South Island from three landowners, some of which is leased to farming couple Stu and Ginny Neal. Ten years ago, they started with a 30 per cent investment in 8000 stock units (sheep and beef) and plant, with Falloon owning the rest. Within five years, the couple’s share had grown to 60 per cent of 18,000 stock units, worth $4.5 to $5.5 million.
Five years ago, Falloon and Andrew Gawith, founding shareholder of Gareth Morgan Investments, bought a 900ha farm in the Wairarapa and approached young farmer Jake Ellison, then in his mid-20s, to come in as an equity partner.
Falloon and Gawith loaned Ellison the money to buy a 10 per cent share of the stock and plant. Now, at the age of 29, Ellison owns 30 per cent and is making a good annual income. Ellison has the right to buy up to 50 per cent of the stock and plant, and after that could consider buying into the land.
“He’s his own boss, employs his own staff. He’s a [much] better businessman than he was five years ago,” Falloon says.
The model can also be used to gradually buy other family members out of the land itself, he says.
Mum planned the handover early
Waikato dairy farmer Anna Kalma has her mother to thank for early succession planning. She and her two brothers were in their early 40s when her mother, separated from Kalma’s father, raised the subject.
“For her, farming was a real way of life, and she wanted us kids to carry that on.”
Kalma and the extended family worked out a plan, based on a company structure, whereby each sibling would buy between 75 and 80ha from their mother, and she would leave money in. The siblings would pay her interest and principal. Now, Kalma and her brothers, who have also bought larger holdings, farm side by side, with their mother on an adjacent 5ha property.
Kalma, a committee member of Smash, says the lack of a succession plan is an issue that is raised repeatedly, particularly by the owners of smaller farms.
“It’s a problem for people who either want to exit out of the cowshed themselves, and also for the younger ones wanting to progress into farming,” she says.
Kalma and others in the farming community say it’s important to keep small to medium-sized farming units going because that’s where people learn the skills needed to run a farm profitably. The risk is that smaller holdings will be bought up by large-scale overseas corporates, and what is currently a strong farming community will gradually disappear.
‘They wait for a trigger’
Morrinsville farmer Mitchell Coombe looks after 14 farms, some of them for farmers who have no one to hand the cowshed over to.
“It’s not like 50 or 60 years ago, [when] the oldest son got everything and tough cookies. That wouldn’t float in many households nowadays.”
Many farming sons and daughters have gone to university and established their own careers or businesses, leaving ageing parents wondering what to do with their intergenerational farm. It’s a high-risk model, Coombe says.
“They wait for a trigger, and the trigger often is health. Nothing is planned, no one knows what to do - you’re in a crisis, effectively.”
Coombe’s farm management company, TCG Agriculture, came about after he realised some farmers had no one to pass the farm to. They were reluctant to sell but wanted to move to town and enjoy retirement.
One Waikato owner is in his 80s, a third-generation farmer with no children. The farmer’s niece and nephew will eventually inherit, but they have their own careers and lives. Coombe’s company bought the dairy herd and is running the farm under a 10-year lease, giving the farmer an income.
Coombe employs contract managers, but as part of his own succession planning, he encourages them to buy some equity in the business. What he’s looking for are young farmers who want to stay, have a “slice of the pie” and attach a life to one property.
“There’s a really vicious cycle in farming of people moving jobs a lot. I’m trying to curb that a little.”
Like others in the industry, Coombe, 30, is concerned about the future of farming.
“There are not a lot [of farmers] in the 18 to 35 range, and especially not in a position where we can buy a multi-million-dollar farm asset.”
He has been involved in succession planning discussions with farm owners and has witnessed the issue cause so much conflict that siblings no longer speak to each other. But, he says, it’s a conversation that needs to happen before it’s too late.
Succession is a team effort
The succession issue is likely to affect thousands of farming families in the future. According to Statistics New Zealand, there are 47,240 farms (down from 50,700 in 2018) spread over 13.19 million hectares, the majority of which are dairy, beef or sheep farms.
With New Zealand farmers’ average age steadily increasing, both Dairy NZ and Beef + Lamb New Zealand stress the importance of working out a succession plan to ensure a successful transition.
Extensive information, including online learning modules, videos and podcasts, is available on the Beef + Lamb NZ website, and additional information can be found on Dairy NZ’s website.
Ian Blackman’s book Keeping Farming in the Family: A guide to farm succession is available on Trade Me for $60.
Jane Phare is a senior Auckland-based features and investigations journalist, former assistant editor of the NZ Herald and former editor of the Weekend Herald and Viva.