Funding farming for the future
GIVE young farmers options and opportunity and they will do amazing things.
This is what 2012 Nuffield Scholar and Dumbalk North farmer Damian Murphy believes, and he wants to do something to make these options and opportunities readily available to young farmers.
As part of his scholarship, Mr Murphy has designed the Young Farmers Finance Scheme (YFFS).
With the average age of farmers growing higher and higher, the opportunity for younger generations to own and operate their own farms is becoming increasingly scarce.
Mr Murphy said the idea behind the YFFS stemmed from a background in machinery.
“It started a long time ago,” he said.
“I realised it’s really easy to get finance on things like machinery, which is a highly depreciating asset, but then for a young farmer, especially in the dairy industry, to go and finance cows it’s really difficult and almost exclusive.”
Mr Murphy said finance is one of the biggest barriers to young farmers entering the industry, with many not having a farming background and a family farm to help them start somewhere, and he is concerned it will prevent promising farmers from persisting with their ambitions.
“Lots of farmers are above 55 and they’ve got a huge asset in agriculture. They’re sitting on farms, machinery, and cows, and all these farmers have bought the next door neighbours and are getting bigger and bigger,” he said.
“Young farmers can’t just come in and buy a $3 million farm and that’s the issues we’re going to have.
A YFFS won’t only help young farmers, but help the whole industry by getting that transfer happening. Without it, we may find farmers sitting on an asset they can’t sell, and the price will drop and nobody wins.”
So how does it all work?
With aid from the Gardiner Foundation, Mr Murphy has come up with complex strategies to help farmers in all agricultural industries, with the first being transition loans.
“It’s a really simple, easy to follow loan program and I’m really pushing this in Australia now,” he said.
“The biggest problem of a young farmer gaining that asset is trying to make that cash flow work to make the repayments.”
Just say you buy a farm for $500,000.
Mr Murphy said as part of a transition loan, the bank will guarantee your $500,000 is paid out in equal instalments over five years, whilst the famer only pays the principal interest on $100,000 in the first year, and $200,000 in the second year and so forth.
“The interest I pay steps up to match my cash flow,” Mr Murphy said.
“So the first year when I’m struggling and pumps are breaking down and I’m moving costs, that’s when my loan is the least, and that’s what makes the difference. The payments match my cash flow and that’s the key thing.”
Mr Murphy said the loan structure also gives farmers the ability to pay off their loans earlier if they are doing well and can afford the same repayments as a standard loan, saving thousands in interest payments.
“It’s no smoke and mirrors; you just get your amount over five years,” he said.
A young farmer doesn’t mean mid-20s to late-30s either.
Mr Murphy said around 40-years-old seems to be the age many farmers are trying to break into the industry for the first time, and he’d like to see different levels of assistance available to them.
“People have this idea of young farmers being risky and inexperienced, but when you’re talking about 40-year-old farmers, that’s not necessarily the case,” he said.
“I think there are two stages of young farmers; those who are working on getting stock, equipment, crop inputs, land rent and short term loans are stage one, and those who want land, buildings and infrastructure, and long term leases are stage two. So not everyone is getting assistance. If you need assistance, you’ll get it.”
Tie all these ideas together, and what Mr Murphy is proposing is designing a tailor-made financial program that will work in Australia.
“What I’m looking to change is the tax system and finance system,” he laughed, not oblivious to the challenge he has ahead of him.
“I need from the government a guarantee on a fund I’m proposing and some tax incentives to help finance it and make it work.”
Mr Murphy has come up with a Future Farmers Fund (FFF) that will assist stage one and stage two farmers gain assets in agriculture.
At present, to avoid high tax bills, farmers are able to put their money in a Farm Management Deposit (FMD), which they do not get taxed on.
At the end of the last financial year, there was $3.1 billion sitting in FMDs, and Mr Murphy said this money can be utilised to benefit all.
“Retiring farmers have got a huge capital gains tax so everyone’s trying to minimise how much of that tax they pay. They have the choice of investing in superannuation, or buying a smaller farm and running beef cattle,” he said.
“I’d be looking for a tax incentive for retiring farmers to invest money in this Future Farmers Fund. Say if super’s paying out five per cent, this fund might pay back 3.5 per cent, but then the tax incentives they get back equals the superannuation so from a cash flow point of view, the farmer can invest in super and help out young farmers and hopefully they’ll take the young farmer route.”
Mr Murphy said he would also like to see FMDs changed to allow farmers to make a contribution to the FFF.
“If I went to Rabobank and said I want an FMD and I had $10,000 to put in it, I could actually nominate how much percentage goes to the FFF. For example, I could nominate 90 per cent to go into a normal investment portfolio, and 10 per cent to go into the FFF,” he said.
“The kicker is, if only one per cent of this FMD money goes in, that’s still $3.1 million.”
Mr Murphy said his scheme doesn’t also rely on the dairy farming industry to be strong.
“If Dairy Farming Victoria is having a bad year and they are pulling money out of FMDs, bananas or cattle in Queensland might be having a terrific year, so it should be fairly stable,” he said.
The way the FFF would assist young farmers is to give them the security they need when applying for a loan.
“When the bank says ‘we don’t think you have the security’, but they think your business plans say your cash flow should be good enough and you’ve got the skills, the bank applies to the FFF to make up the difference,” Mr Murphy explained.
“If the bank wants 40 per cent and you ticked all the boxes, the bank would apply to the FFF to get that extra 20 per cent. Then the bank would have the first mortgage on the loan, and the FFF would have the second.”
Mr Murphy said ideally, he’d also like to see a concessional interest rate loan reduction of two per cent to really help stage one and two famers.
Essentially, the YFFS and the FFF are farmers helping farmers.
“You really see it around here with dairy farmers; they don’t necessarily retire because they can just see this huge capital gains tax bill coming, so they’ll churn over and just run beef cows,” he said.
“I’d like to see some way where there’s assistance. It’s using tax as a tool to help generational change and not hold it back.”
Mr Murphy now needs to develop a marketing plan to help sell his scheme, as well as get some industry and farmer support before going to politicians and the banks as an agricultural industry.
Of course, Mr Murphy has the full support of Nuffield Australia, with these types of plans exactly what they hope to get out of their scholarship recipients.
CEO Nuffield Australia Jim Geltch said Nuffield will use all available outlets to ensure the contents of his report and recommendations are distributed as widely as possible.
“I think it’s essential. I think the scholarship program is all about capacity building in agriculture, particularly with the reduction in numbers of people actually entering agriculture,” he said.
“Coupled with the need to produce more food as the virgin world population demands higher quality food produced sustainably, it’s absolutely essential that our farmers have the capacity to respond to those needs of the global population. Through Nuffield scholarships, we try and achieve that outcome.”
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