Owning a dairy farm and a kiwifruit orchard are the perfect duo for many farmers in the Bay of Plenty. Ian and Wilma Foster run their farm and orchard as one company but use enterprise accounting to ensure each business is at its most profitable. Sheryl Brown reports.
Dairy farmers have branched out and made off-farm investments for generations and crossed over their expertise to other industries. Whether it’s buying multiple dairy farms, investing in farms offshore, a runoff, horticulture, commercial or rental property or shares – it offers their business diversity and spreads their risk profile.
The trap dairy farmers can fall into with their off-farm investments is that the dairy farm can mask the poor performance or vice versa.
The fundamentals of a good business are the same, it doesn’t matter what industry you’re in, DairyNZ farm business specialist Wilma Foster says.
Make a plan, set a budget, monitor your spending – all the same principles apply.
Dairy farmers investing off-farm should use enterprise accounting to keep track of their different investments and ensure each business stands on its own two feet, Wilma says.
‘I need to get clarity on what’s working and what’s not working. We do a monthly GST return, that makes sure I keep my cashflow up to date and can compare against the budget.’
Enterprise accounting is recording the income and expenses of each business so they can be assessed separately.
“Farmers should be exercising enterprise accounting so they can monitor the true performance and costs of each farm on its own merit,” she says.
If a farmer’s runoff is not making money, but it offers them security on their stock or it makes them feel good because they are in control of rearing their own young stock or growing their own crops that is fine, as long as they’re aware of its true performance and the cost that security is having on their business.
Wilma and Ian run their dairy farm and kiwifruit orchard accounts through one company, but they use enterprise accounting to code things back to the orchard or the dairy farm. The administrative costs are run together.
Wilma does the dairy farm budget, Ian does the orchard budget, and they sit down together and write a combined budget for the year.
“I need to get clarity on what’s working and what’s not working. We do a monthly GST return, that makes sure I keep my cashflow up to date and can compare against the budget.”
From milk to fruit and back again
Wilma and Ian have been involved in the dairy industry for more than 20 years. The couple started out sharemilking for Wilma’s parents in the Waikato milking 170 cows. They took on a second sharemilking job milking 230 cows, before selling the herd on one job and buying a small dairy unit at Maihiihi near Otorohanga.
On the conclusion of their existing sharemilking job they decided to travel a different path.
The couple reflected on their equity growth opportunities and Ian was ready to try something new.
They sold one of their herds in the peak payout of 2007/08 when cows were averaging $2500/cow, which gave them the cash to buy a 2.67-canopy-hectare Hort 16A kiwifruit orchard for $1.7 million – which bought them a house and also effectively bought Ian a job.
“One of the best decisions I made was to talk to our bank manager. We wanted to buy a house, not in town, but on some land that could pay itself off. He put me on to his colleague in Tauranga and I sat down with him to discuss our best options.
“Bankers know what’s working and what’s not working, instead of looking at all the options ourselves.”
Kiwifruit was the most ‘bankable industry’ at the time and the bank manager gave Wilma the key performance indicators to look for when buying a kiwifruit orchard, so she went to a real estate agent with a shopping list.
The shopping list included Ag Beam structures, good shelter, the good performing areas and if buying a kiwifruit block north of Tauranga, on the seaside side of SH2 with a high yield. It also needed to include a reasonable house and to be on the school bus route for their two daughters, Kristy and Anna.
“It was a really basic list of things. I didn’t have time to waste coming to look at properties, we were still living in the Waikato. Within six weeks of making the decision to move to the Bay of Plenty, we had bought a kiwifruit orchard.”
Wilma studied a Bachelor of Agriculture Science at Massey University after she left school and worked as a consultant for Agriculture NZ before she ‘retired’ to have children and work on the dairy farm.
Once she moved to the Bay of Plenty she started working for DairyNZ as a consulting officer.
Meanwhile, Ian immersed himself in learning about a new industry.
“Whether you’re working out in the orchard daily or you’re a passive investor you need to have a good knowledge of the industry you’re entering into.”
They moved their dairy farming operation to Pukehina three years ago. Ian manages the orchard and Wilma oversees the dairy farm, alongside her new role with DairyNZ as Farm Business Specialist for the Upper North Island.
With a foot in both industries they’ve managed to continue to grow their equity. They’ve just bought a neighbouring 17ha to their dairy farm and are refencing it.
“A horticultural consultant told us that in a kiwifruit orchard you harvest light and turn it into kiwifruit, that resonated with us as essentially on a dairy farm you harvest light to grow grass, and turn it into milk.
The dairy farm is a good one-person sized operation and they currently employ a contract milker. They had a farm manager during the first two seasons, and when the payout was low, Wilma and Ian did all the reilief milkings, staying in a cabin on the farm when required.
“When times are tough you roll up your sleeves.”
Investing in another industry has its benefits and risks and farmers need to consider all of these carefully before jumping in, Wilma says.
They had only owned the orchard for three years before PSA arrived. Through PSA they were lucky to have the dairy farm as financial support and through the dairy payout downturn in recent years, the kiwifruit orchard assisted the dairy farm.
“Although this is the overall picture, we are keenly aware how much profit each business makes, and address underperformance within each business. We don’t want either business to be making losses or reliant on the other for success.
“We got through both PSA and the dairy downturn without any significant extra borrowing. We didn’t have that extra $1/kg milksolids debt that a lot of dairy farmers had to take on.
“The kiwifruit orchard had been grafted to the new Sungold (G3) and had started harvesting just as the dairy downturn hit and was able to offset the dairy farm.”
During PSA they stopped house renovation and focused on grafting over to the new G3 variety. At the same time they invested in their business and ripped out their shelter belts and put up overhead netting, which increased their canopy hectare area by 0.6ha.
While the new variety has been successful for them so far, there is still a lot to learn about the new G3 plant, Wilma says.
“We don’t know everything about how to grow it and get consistent high-yielding and tasting fruit yet. I have noticed that in the kiwifruit industry sometimes you’re running ahead of the science, people are willing to take a risk on new cultivars early in the process without the guarantee of success.”
The industry also focuses on growing the fruit and doesn’t have as rigorous and transparent financial benchmarking system compared to the dairy industry and DairyBase.
Growers she talks to often don’t know how much it should cost them to get their crops, she says.
“Because there is a lot of money in the industry, you can waste money on things you don’t need.”
The biggest difference with a kiwifruit orchard compared to dairy farming is that the entire annual crop is sitting in the orchard until it’s harvested. While it’s there it is subject to storms, cyclones, hail, frost and any other weather event that could impact fruit.
“Dairy returns are lower, but as soon as your milk is in the vat, you get paid. With the orchard we have the crop sitting out in the weather until harvest. I start stressing about March before harvest (April/May).”
While gold kiwifruit is getting returns of more than $9/tray at the moment, future investors need to be aware of the risks, she says.
“I do get concerned with what’s happening in the kiwifruit industry, it’s great that prices have rocketed, but it’s still a high-risk industry. After PSA hit, some people had to sell their kiwifruit orchards at land prices.
“I wonder if some of the people buying into kiwifruit orchards don’t appreciate the full risk. The saying is to expect one in 7-10 crops to be impacted by weather event, and the risk of introduced pests and diseases which will affect yield and potential markets is high. But I’m not sure people build that into their risk profile.”
Talking about diversity
Being a consulting officer for DairyNZ in the Bay of Plenty for the last 12 years, Wilma has, by default, been involved in discussions about farmers’ non-dairy investments. Many Bay of Plenty dairy farmers have kiwifruit orchards, so they’ve often being part of the tabled discussion, she says.
“It’s given me the ability to look at the bigger picture and ask farmers about those investments.”
Often the issues relate to farmers really knowing what they want to achieve with their business and how this meshes with their personal goals and aspirations. Farmers that are really clear on what they want to achieve always seem to find a path – that’s not luck that’s intent. Where there are businesses that involve more than one industry there is a need for everyone involved to be around the decision-making table. This could involve agricultural and horticultural consultants working together more to ensure the strategic and business plan for the whole business is considered in their individual areas of expertise.
Wilma’s new role as Farm Business Specialist for the Upper North Island is about helping the accountants, consultants and other rural professionals offer a better service to dairy farmers.
“Part of my new role is working with our own DairyNZ team and other rural professionals and advisors to encourage, support and assist them to have those conversations with farmers.
“Sometimes we’re afraid to ask the question – but we can help farmers see the big picture – and advise them on what they need to be doing to achieve it.”
Her role includes using tools DairyNZ has developed such as Farm Gauge which is helping consultants and farmers evaluate eight areas of the farm business and has led wider conversations between consultant and farmers, especially in areas which they may not have previously felt open to discuss with farmers.
The categories include; strategy, feed, financial, herd, people, health and safety and wellbeing, environment and infrastructure.
Big isn’t always better
Wilma and Ian’s daughters are not working in the family businesses at the moment. Kirsty is working in Auckland, and Anna is studying veterinary science in Australia. Currently Wilma and Ian are focused on paying down debt and working towards financial freedom.
“We have thought long and hard about what is right for us. We don’t have to own the whole world – we are happy where we are, currently we want to pay off more debt, if opportunities arise we will look at them.”
There will be new threats of pests and diseases to both industries in the future and having different investments is a good way to spread your risk for your retirement, she says.
It’s also good to have different assets which can help when it comes to family succession, she says.
“There is a mindset in New Zealand that bigger is better – but farmers need to ask themselves what they really want to be doing. Do you want to be on a smaller farm out with the cows, or on a big farm with more time needed behind a desk managing staff and doing paperwork? I have seen people ‘trapped’ in both scenarios and both ultimately wondering how they got there and are unhappy. It’s about choosing what’s right for you.
“What do you want to be doing every day? You’ve got to do what you enjoy.”
Owners: Ian and Wilma Foster
Cows: 230 crossbreds
Production: 70,000kg MS
DairyNZ Farm System 3
Supplement: 0.6 t DM/cow
Location: Te Puna
Area: 3.2 canopy hectares
Variety: SunGold (G3)
Yield: 17,500 trays/ha