Putting debt to pasture over milk price

HARDWORKING farmers can’t control the milk price. All they can control, writes Barefoot Investor, is earning other sources of farming (and non-farming) income.

Dairy farmers face lower milk prices in the next three years.

HARDWORKING farmers can’t control the milk price. All they can control is earning other sources of farming (and non-farming) income.

PAUL ASKS: I’m a dairy farmer and feel I have been let down by our co-operative, Murray Goulburn. I now have a debt to them that’s been backdated. Should I pay it back or leave and not have to pay it back … you see, the debt stays with the factory and not the farmer.

BAREFOOT REPLIES: You’re dead right. As I understand it, it’s not so much a debt, as it is a clawback (via accepting lower milk prices) over the next three years. For most dairy farmers that means producing milk at break-even at best, or a loss at worst. So if you look at the situation rationally, you could walk away and avoid paying anything back, and avoid the next three years of painfully lower prices. You could sell off your cows, lease out your land (if you can), and get a job in town (if you can). And ride it out. Yes, that’s a lot of “ifs” and “coulds”. But as a hardworking farmer, you’d be used to that. You can’t control the milk price, you can’t control the interest rate or terms the bank imposes on you, and you can’t control the weather. The only thing you can control is earning other sources of farming (and non-farming) income. The $64 million question is, what will the milk solids price do? No one knows, not even a bunch of overpaid corporate suits sitting in Murray Goulburn HQ.

TAKE IT AND RUN

NICHOLAS ASKS: My dad is offering me $25k worth of AFIC shares to put in my portfolio. Sounds good but I was wondering what effects this would have on my tax. I take home $700 a week after tax.

BAREFOOT REPLIES: Hang on a minute. Your old man is giving you $25k in AFIC shares and you’re worried about your tax position!? Let me explain how it works: Let’s say AFIC makes $1 of profit, and pays 30c in tax. The remaining 70c is a dividend. When you do your tax return, you’ll declare 70c of income, plus 30c in tax credits for what AFIC have already paid. You’ll pay tax on the $1 at your marginal rate of 32.5c in the dollar. In other words, you’ll still get a post-tax dividend of 67.5c. And if you want the benefit of compound interest, you should tick and sign the Dividend Reinvestment Plan letter that will be sent to you in the mail, which will automatically recycle your dividends into more AFIC shares, generally at a discount to the market price and without incurring brokerage. In short, I’d suggest that the next time you see your father say something like this: “Dad have you been working out? Because you look amazing!” Then wash his car. Then thank him for giving you a financial headstart that most kids never get.

CUT OUT THE FEES

WENDY ASKS: What is a reasonable ongoing management fee for invested funds? My wife and I have just over $1 million invested in our self managed superannuation fund. We paid $13,200 in management fees over the past 12 months, which works out at 1.21 per cent. If published, please do not use my real name.

BAREFOOT REPLIES: First up, I always change people’s names. Second, I’d argue that you don’t actually have a “self managed super fund” ... you have a “financial planner managed fund”. There’s nothing “DIY” about handing over $13,200 in fees a year. For comparison, the super fund that I recommend to my friends and family charges 0.03 per cent a year (with a mixture of ASX 300 shares, international shares and fixed interest). It also provides the opportunity to buy individual shares within the super fund (for an extra $280 a year plus $20 a trade). In your case that would bring down your fees from $13,200 to about $400 a year. If you don’t have property in your fund (which I don’t recommend unless you’re a small businessperson), I reckon that’s a no-risk, guaranteed way to boost your super by at least $100k over the next 10 years.

DO IT FOR THE KIDS

TONY ASKS: In a previous article called ‘Time to Think of the Kids’, you outlined an investment bond strategy which would work well for our two kids, who are four and six. After researching it I’m not sure how to go about investing in bonds. Are you able to point me in the right direction? Also, do you think this is still a sound approach given the current low interest rates? Thanks for your help and your articles, which are the only financial information my wife pays attention to!

BAREFOOT REPLIES: Excellent question. The word “bond” throws people off. Your ‘investment bond’ doesn’t actually have to invest in bonds — and in fact, given it’s a long-term investment for your kids, I wouldn’t advise it. Instead, you can choose to make the underlying holding a managed portfolio of shares. Lifeplan has a range of options that since 2008 have returned around 8 per cent for international shares and 10 per cent for Aussie shares.

 

CRED WHERE IT’S DUE

VINCE ASKS: On holiday recently I went to the reception desk at the hotel and was asked for my credit card. I explained to the guy on duty that we do not have one (being Barefooters, we willingly cut it up and now get by without one). So I had to pay the security deposit for the room in cash. The guy gave me a semi-stern lecture about the importance of having a credit card in the modern world. It made me feel a bit like a “financial leper”.

BAREFOOT REPLIES: Like you, I don’t have a credit card in my pocket. Unlike you, I see it as a source of pride. It’s the ultimate anti-status symbol. I certainly don’t view myself as a leper — but a leader. If you’ve got kids, you can bet they’ve noticed (and if they haven’t, tell them: “Dad pays cash”). As for having to hand over cash (which you can easily do via a debit card) to secure a room or a car … well, I think that’s a very first world problem to have.

 

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The Barefoot Investor holds an Australian Financial Services Licence (302081). This is general advice only. It should not replace individual, independent, personal financial advice

Originally published as Putting debt to pasture over milk price