May 15, 2014

OPINION: New Zealand dairy investment isn’t such a bad bet (originally published on Agrimoney.com)

I was most interested in the comments by Aquila on Agrimoney.com comparing returns from Australian and New Zealand dairy farms.

Aquila made some interesting points in favour of Australia. However, I believe that New Zealand remains the better target for investment.

Land price comparatives

Land prices – whether one country’s land prices are higher or lower than another country’s is neither here nor there. It is the current and expected long term sustainable economic returns that matter and on this basis New Zealand dairy land prices quite justifiably need to be higher than Australia’s.

Notwithstanding this, figures extracted from Reinz charts show that dairy land prices based on a per hectare basis are at the same level as what they were in mid-2007 whereas the dairy farm price index is at the same level as late 2006.

This is not the sign of an over-priced market, especially when one considers how the global milk trade has performed.

As Aquila noted, New Zealand does not have stamp duty or capital gains tax and this in itself also justifies a higher pricing.

Milk production records

Economic returns – In the past season according to Dairy Australia figures, the milk payout received by farmers in Australia only went up 25%. In export-focused New Zealand, it went up over 40% – and from a higher base.

And on performance, while New Zealand’s dairy industry has been going from strength to strength, Australia’s has continued to slide backwards.

As Dairy Australia figures attest, from peak production in 2001, production has fallen by over 18% whilst New Zealand’s has increased by over 46%.

‘Cheap for a reason’

There is also the question of exit strategy.

It can be a struggle to exit dairy farms in Australia as anecdotal evidence of farms under bank control and farms that have been on the market for years show.

I note Aquila’s intention to buy farms in Tasmania and Victoria. I know that farms have been on the market in Tasmania for years with some current owners reducing their book value each year.  A recent article in North Queensland Register noted that there is “an oversupply of dairy farms for sale in Victoria”.

While entry may look cheap, it is cheap for a reason and one needs to be very cautious and factor in a more realistic exit price, including capital depreciation.

It is also interesting to note that even the Chinese, with their drive for food security, have have recently walked away from some Tasmanian farms.

‘At the mercy of the supermarkets’

Turning to climate, New Zealand has a more reliable climate for growing grass, and therefore relies less on purchased feed, and has access to the high volumes of water required for dairy farming, even after factoring in climate change. For any long-term investor, these are important considerations.

And on industry structure, New Zealand has a unique industry structure that allows farmers to have a direct and transparent exposure to global dairy prices.

By contrast Australian farmers are at the mercy of the local supermarkets that effectively cap the returns that farmers can achieve. For the portion that Australia exports, New Zealand farmers are also beneficiaries through their ownership of Fonterra (a major exporter of milk out of Australia).

In other words, an investor can gain an exposure to the more profitable part of the Australian milk trade by being a Fonterra shareholder farmer in New Zealand.

‘More compelling proposition’

Furthermore, Australian labour costs are higher and less flexible. Milk processors in Australia have recently been pleading for Australia to adopt New Zealand rules that that allows for work hours to correlate to seasonal milk production.

In summary – the world needs Australia to do well in dairy and as such investment is to be encouraged and Aquila is to be commended for its courageous plans.

For an investor looking for a more compelling risk/return balance, New Zealand remains the more compelling proposition.

The author is an international agricultural investor with interests in both Australia and New Zealand

What do you think about the relative benefits of Australian vs New Zealand dairy investment? Or are there better prospects outside Oceania altogether?

Send your comments to inquiries@agrimoney.com.