Is a second farm worth the gamble?

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Investing in a second farm can be a tempting option for dairy farmers looking to expand.

But success on the home farm is not always a guarantee of success on another farm, a South Gippsland Dairy Expo virtual panel session on September 14 was told.

A second farm can deliver good returns, but operators should expect volatility – and that could mean some years of big losses.

The panel session, which is always an expo highlight, this year featured consultant Matt Harms, from Onfarm Consulting, and Gippsland dairy farmers Evan Campbell, Paul and Louise Sherar and Phillip Ould in an online presentation, as the physical event was cancelled due to COVID-19 restrictions.

All three farmers had been involved in an investment in a second farm and provided insights into what could go wrong and tips for making it work.

Expect volatility

Mr Harms said the session highlighted investors needed to go in with their eyes open as returns were not guaranteed in the dairy industry.

“I think everyone’s highlighted the industry is a good industry, it’s a strong industry, but it’s a volatile industry,” he said.

This was certainly the case for the Sherars and Phillip Ould. The Sherars are 60:40 sharefarmers on Mr Ould’s farm at Loch, Vic.

In 2016 they decided to form a partnership to buy a second farm at nearby Nyora, Vic.

A month after they took over, the milk price crashed. They also faced a wet winter that year and the herd they brought to the farm calved at a time that was not ideal for that farm, especially in wet conditions.

“We had three really bad years,” Mrs Sherar said. “Obviously, as you know, 2016 was a horrendously bad year but we purchased a farm, the milk price dropped, the season was bad.

“So there was a compounding factor of badness there, and for the following three years we were playing catch-up, and it wasn’t until this last year of our farming venture there that we actually probably caught up and made a good profit out of it and saw the rainbow at the end.”

COW MAN: Paul Sherar describes himself as a cow man and has used his ability to raise stock to build wealth in the dairy industry.

Mr Sherar said in 2015 the couple was looking for an investment option after building young stock numbers as sharefarmers.

“We were always keeping every heifer calf that was born, even the calves out of the two-year-old heifers,” he said.

“And it fairly quickly got us into a position where we had to think about doing something because we had too many cattle for this farm.”

They were involved in the Focus Farm project at that time and put the idea to their support group that they replicate what they were doing at Loch on a second farm.

“There were quite a few there that weren’t supportive of the second farm,” Mr Sherar said. “They were of the mind they’d just cash them in, but it was something we’d actually dabbled in in the past.” The couple had previously leased a second farm at Koonwarra, Vic.

So they were confident it could work.

Mr Ould was also confident about the investment, having tasted success with his initial foray into the dairy industry.

He had run a fertiliser business for 40 years before initially buying a block next to a dairy farm, with the opportunity to lease back to the former owner. He then bought the dairy farm when it came onto the market a couple of years later and put on sharefarmers.

“I’d never sort of aspired to be a dairy farmer, that was something that never really entered my mind,” he said. “I mean Dad always said people who milk cows were crazy.

“From dealings with people and dairy farmers, it seemed that they did have an opportunity to reduce debt and I saw that they were buying land and doing things.

“So it seemed like it was a profitable exercise in the hands of the right people.”

Mr Ould said the Nyora farm proved challenging in other ways, despite being a good farm with good facilities. “Compared to here at Loch, it wasn’t as easy to manage, there’s a lot more upkeep on it,” he said.

In the first year a number of pieces of equipment needed to be replaced and the farm was just big enough to need an employee, as well as a manager.

In the end, Mr Ould decided he wanted out of the investment and the Nyora farm was sold earlier this year.

“Ultimately when the decision was made to sell the farm, it wasn’t really the financial part of it,” he said.

“It was my decision that I wasn’t comfortable with the workload that was involved with it. And I wasn’t comfortable with what I was doing to the farm here at Loch in that I didn’t have the time to put into the farm … that I wanted to.

“I couldn’t see myself doing both farms for the next five or 10 years. I didn’t think I was capable of it.”

PARTNERSHIP: Evan Campbell (centre) is in an equity partnership with his parents Noel and Ann Campbell and their long-time sharefarmers Dean and Bek Turner.

PARTNERSHIP: Evan Campbell (centre) is in an equity partnership with his parents Noel and Ann Campbell and their long-time sharefarmers Dean and Bek Turner.

Evan Campbell took the step into farm business ownership in partnership with his parents Noel and Ann and their long-time sharefarmers Dean and Bek Turner.

After growing up on the family farm at Yannathan, Vic, Evan said he didn’t have much interest in the dairy industry and after studying engineering worked in Saudi Arabia in the oil and gas industry.

But a ‘quarter-life crisis’ forced a rethink and he returned to work on the home for what was to be a six-month position.

“That ended up becoming two years,” he said.

“I decided I kind of liked it, but I was actually working for my parents’ long-term employees and sharefarmers.

“So there was an appetite for me to grow responsibility but there wasn’t a natural place for me to grow into.”

An opportunity presented itself when the farm across the road came up for lease.

So Evan along with his parents and the Turners formed an equity partnership to lease the farm with Evan as the manager.

The structure is quite complex. All parties contributed cows at the start but Evan’s parents do not provide any replacements in the herd, so their share of the business is slowly diminishing and the other two parties’ share is growing.

This meant at the end of each financial year, the partners drew a line in the sand, and if the business had surplus money, that was recorded, and as cash flow allowed, a dividend paid.

Volatility also played a part on this farm.

“So in the first year, more or less, it was a slight surplus,” Evan said.

“But that didn’t take into account heifer rearing costs. This business that I’m managing day-to-day is just a milking platform so all of the partners have heifer rearing costs or lease land costs (for heifers), those sort of things in the background.

“Whilst the business was able to make a dividend in the first year, it it didn’t cover the cost of what was happening in the background, especially because Dean and I were growing more animals.”

But Evan has been able to generate a good return on his initial investment in the business.

He started with an investment of about $85,000 or so in the 40 cows he contributed to the herd, plus additional young stock, taking his total investment to $150,000.

Three years later he has about 210 animals, worth about $350,000.

“So in terms of cash in the bank it’s probably covering my expenses,” he said.

“So cash wise it’s been stressful at times, but if you keep your eye on the equity growth with the growth of cattle numbers … it’s probably been in the vicinity of $200,000.”

Evan said the returns and ability to grow made dairy farming appealing compared with working for a salary, even if the wages at the start were not as good.

“Well the first two years that I came home I was just working as a trainee farmhand really, despite the fact that I’ve grown up on the farm.

“The wages for that isn’t great, definitely not compared to the oil and gas industry.

“I think what time in the oil and gas industry allowed me to see … the money was okay but that was a very stressful job.

“Dairy farming’s pretty stressful as well but it’s pretty rewarding and it’s your own business so what you put into it generally speaking you get back.

“So I think that that’s probably the key difference. Rather than busting your backside for a multinational company, you’re sort of doing it for yourself. I think there’s a connection to the land too.”

Tips for making it work

WATCH: The full session

Having a clear agreement and structure was vital for making this type of investment work.

Mrs Sherar said they had a unit trust with a couple of businesses that owned the land and the business, which had a manager and staff running it.

“We all had our own responsibilities and knew what we were doing,” she said.

“So Paul being the cow man looked after the cows, the feed; Phillip looked after all infrastructure and I looked after staffing and bookwork.

“We had a drawn up agreement that stated everything in the agreement as to what would happen in various circumstances. So everyone was on a clear page.”

Evan said because the Turners had been sharefarmers for his parents for a long time, they had a common approach to farming, which made the working arrangements seamless.

Good communication was critical.

“In the first six months … we were having monthly meetings: what’s happening on the farm, what’s happening behind the scenes, how’s cash flow,” he said.

The Sherars and Mr Ould agreed about good communication being key.

They also said having good staff was vital on a second operation when the owners could not be there all the time. The manager they appointed had worked previously for the Sherars on their lease farm and was excellent but they struggled to find the additional staff the Nyora farm needed.

In hindsight, they said the farm could have been just slightly too big as a second operation.

Proximity of the second farm was also important.

Evan said having the farm just across the road enabled them to utilise a lot of the same equipment, like tractors and mowers, so they didn’t have to duplicate the capital investment.

Mr Sherar said the Nyora farm was only 10 minutes down the road, compared with 30 minutes to the previous second farm they had leased at Koonwarra. This was both a positive and negative.

“Sometimes if the manager’s rang you and they’ve got a problem, you’re like ‘right, I’ll be there in 10 minutes’ and sometimes you don’t want to be there in 10 minutes,” he said.

Owning the Nyora farm, rather than leasing it as they had done at Koonwarra, also made a difference.

“Sometimes you have to go there to fix issues that have arisen whereas on a lease farm (if the) motor blows up you ring the owner and let them deal with replacing it,” he said.

Evan said he liked being on a lease farm, but it was also important to work with the owner.

“We’ve got a lot of communication with farm owners,” he said. “We made an investment to build a calf shed so I suppose you’ve got to look for the win:wins.

“We were happy to stump up some additional money to make a long-term investment in this farm, despite the fact that it’s a lease farm.”

Mr Ould said it was important to pick the right farm. It needed to have good facilities to attract staff but it also needed to be easy to manage.

“The farm at Nyora was a good farm, it was a very pretty farm, but compared to here at Loch it wasn’t as easy to manage,” he said.

“There’s a lot more upkeep on it from that point of view, so that needs to be considered.”

It was also vital to be financially viable before investing in a second operation.

“So that if there are shocks, which the industry seems to be a bit prone to, that you can ride out those shocks,” Mr Ould said.

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