It is always a delicate balance between making investment choices, then how to fund the investment.
For farmers, there are 6 major motivators for funding requirements:
1) Property acquisition
2) Livestock acquisition
3) Infrastructure investment
4) Succession (intergenerational transfer)
5) Off farm investment
6) Working capital for business expansion (leasing, agistment, feedlotting etc)
Each of these areas really deserves a separate article, so for this case I will concentrate the discussion on the first point, property acquisition.
Total Funding Requirements (beyond acquisition)
Traditionally, property acquisition has been funded by senior debt from the Australian traditional banks. This form of funding is deemed the cheapest form of capital, but it comes with the greatest amount of governance. Generally, a farm acquisition cannot financially support itself against a 100% lend with the policy and governance landscape ascribed to this capital unless the financial dynamics are subsidised by an existing operation. In addition, for further consideration, another 30% of the acquisition cost is generally required just to stock the new property, then working capital and capex on top.
There are many ways of considering the funding dynamics of acquisitions. This article will touch on:
* The real cost of capital utilising traditional senior debt
* Beyond the banks: alternative capital sources
* Case Study: Bank not supporting expansion
Stripping back the numbers, the current range of interest paid for most property acquisitions is between 3.50% to 4.75%. For simplicity, let us work with 4.25%. Assuming Australia’s inflation rate is 2.1%, then the real cost of capital is just 2.15%. Let us also assume that any rural property acquisition has available to it 30% of depreciable infrastructure assets over an average life of 15 years. A farmer paying 30c / $ tax, this provides a further 0.15% saving per annum. Real...
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