It is ironic that on the day Fonterra announced a downgrade of next years projected payout, a Mid Canterbury cropping farm has believed to have been sold for a record figure.
Cropping farms in this area have had years of average returns and ever increasing costs so it is understandable they are looking at alternative land uses to improve profitability.
The challenge is however, that costs in the dairy industry are also increasing and more and more farmers are reliant on a higher and higher payout to survive.
Too much debt in dairying caused problems for many only two years ago, so will the rising cost of land see a return to these issues once again?
Are these new land prices reflective of better productivity and profits in agriculture, or are we seeing the start of a new wave of inflated land prices? Your views?
The sale of a Mid Canterbury crop and grazing property to dairy farmers for more than $12 million shows increasing confidence in farm ownershipreports The Ashburton Guardian. Armadale Farm at Dorie, at 301 hectares, is believed to have been bought at more than $42,000 per hectare, heralded as the highest price in the area for about four years.
Mid Canterbury Federated Farmers dairy section chairman Hamish Davidson said he would not be able to confirm the price one way or the other, but if rumours were true that it was "north of $40,000 per hectare" it was certainly high. Previously, non-dairy farms in that area were selling for $36,000 to $38,000 per hectare.
Mr Davidson said if the goal of the new owners was to convert it, as one would expect it would be, then they would be paying another $5000 to $6000 per hectare on top of the sale price for conversion costs, and then another $6000 to $7000 per hectare for Fonterra shares. So overall it would be costing them up to $55,000 per hectare, or in the range of $16 million.
Mr Davidson said the high sale price underpinned confidence in the equity position of farms in Mid Canterbury. It would be heartening for banks which had lent a lot of farmers money over the years, as well as the farmers themselves, that there was some value in the land they owned.He said there was growing confidence in farming overall, not just dairying. Sheep and beef prices were high and the overall cost of credit was quite low.
"New Zealand is a really attractive place to buy land, there's a lot of overseas people looking at buying land," Mr Davidson said.
While Armadale had sold to a New Zealander, two recent sales in the district, one at Winchmore and one just out of Ashburton, had both sold to ex-pat Kiwis.
21 Comments
Commodities are high because of Benakes willingness to QE, If he doesn't QE III the house comes down. On the other hand if he QE III 's then commodities catch fire, think fuel is expensive today, unhappy with the $ at .82? The lie is that they can keep the system inflating, that there are enough fools to sign on the dotted line.
The UK exports 8,000 tonnes more Lamb than it imports, did you read about that anywhere in a NZ paper? The lie that we can borrow to prosperity is ending. I have a friend who is a very succesfull banker in the UK, this week he wrote to me that he thinks Europe is in for 15 years of hell, Europe is China's biggest market, Russia is the 2nd biggest importer of Dairy products, its wants to be self sufficient in 6 years, they did it with pork and chicken in 4 years. Tell me what happens then to the high growth low cost dairy producers in Argentina, Chile, Brazil etc... what happens to high cost proucers like us? Gas consumption in the States is at 1995 levels, Ok so some power stations have swapped to gas, but even gas for cars is back to 1995 levels, not the sign of a recovering economy.
Woudl quite happily take a lot of your gross assumptions to task but having read many of your insightful posts before will assume that you're having a bad day.
Cheer up, it ain't all bad. BH has been predicting the apocolypse and it hasn't happened yet (and please don't respond with the woes of QE/money printing/socialising losses/austerity/how communism really could save us/JK is a tosser et al)
I do have them, especailly with the weather this year. Whats your thinking on the Russian dairy expansion and its potential flow on effects? I still dont think commodities are in a' free market', happy to be wrong. Im fairly right wing used to be alot more so, now Im a trendy undecided and vote depending on how I feel on the day, it would be so much more interesting at elections if more felt the same way. See my local council has $900 a head debt, but who wants to stand for council, no one around here is interested and Meat and Wool elections are much the same. Dairy is doing well, I just wish they would pay the bills, a friend is still owed money from silage he sold to a dairy farmer in June, which makes one wonder how good things really are.
I think that Russia's dairy expansion plans are part of a world-wide push on dairy production. The key to the success or otherwise of this is going to be around 2 key things - 1. For a given milk price, can profitable production be sustained, 2. what is going to happen with world demand for dairy products.
We've seen huge growth in the developing countries for Demand. A lot of comment in the media about the China story and the potential of India et al. Did you know that the 10 year forecast for dairy demand in NZ is equivelent to 10 month's demand growth in India. Staggering numbers.
The reality is, NZ is well placed to capitalise but has to be at milk price levels fractionally below the level at which Europe and the US can produce profitable mik. The joys of pasture based farming.
So in conclusion, does Russia have a competitive advantage in IP and/or temperate climate that can lead to a lower cost of production?
I don't think so but I may be proved worng. I look to their export ban on wheat suggesting that they do not have masses of spare feed that can go into an intensified dairy production system.
Don't know much about Russia but Ukraine seems to have come back under the Russian sphere of influence. Ukriane used to be the wheat grower for Europe before Stalin sent the bulldozers in and starved and shot the populace. There is presumably great potential to produce more wheat in the Ukraine as the country has never recovered.
Yes, more a high water mark.
Good soil, good water. Gun farms are doing well over 2000+ kg/ha and per cow start with a 6 to 7. Conversion is less. New milk contract would let you defer share purchase for years.
Running with other farms, marginal cost wise this looks like low $20's per kg purchase all up, and operating just looking at marginal cash, these guys would aim for 15%. Could they have bought at 5 to 6 times cash earnings?
Probably means alot of other stuff is still overpriced on an EBIT/ha measure.
Certainly PDK - I am a huge advocate for Trible Bottom Line reporting - People, planet THEN profit.
Agriculture, by its very nature, has to go that way otherwise you do not have a business that is sustainable.
EBIT/ha was the metric that ultimately will decide value - were legislation (environmental or otherwise) to be put in then of course if it were to reduce potential EBIT then values would fall appropriately.
Hi henry
The reality of anything over a max of 1500 - 1600 kgms per hectare is that it is usually driven off high supp feed inputs. This inevitably leads to higher cost and in paddock efficiency and utilisation issues.
More a case of dollar in and dollar out at a certain pointThe farm in question will owe the purchaser just over 60k per hectare dependant on fit out and is more like $40/kgms
A higher flier and on a realistic income forecast would generate. Return of only around 5%
History tells us that when we see a return of less than 6% in Canterbury we either need to see an income increase to substantiate Or we need a readjustments all cyclical, just look at what happened in 2009
Diesel,
This is the problem of averages or rules of thumb.
Each farm has its own production potential - due to soils and quality of water.
This one has "well-drained Templeton soil (Immature Pallic Soil) is among the most fertile and agriculturally important soils in Canterbury", add the free public information (Dairy Exporter Dec 2011) new and recent conversions are doing 1850 (aim for 2000), to 1950 kg/ha with FWE less than $4. Your $40kg/ms number immediately becomes $30kg/ms steadystate.
Each of us have our own marginal costs. 2 types set-up and operating.
Without being specific these guys are going in at less than you think, and by running it as a group doing better as well which together could knock an extra $5kg/ms off your number.
Now work back and compare to units that were bought borrowed at $40/44, on something like a Lismore, short of water and now struggle to produce the district average. Which would you rather have.
You mention these guys doing 5%, they are happy for you to think that.
Hi Henry,
I didnt say I was using an average or a rule of thumb. Productive potential is driven from kgdm or MJME avaliable from growth cycle. While the Templeton soils are good, especially given they dont limit the soil temprature due to overly high water holding capacity, the productive potential under effective spray irrigation is not massivly different of that of a mid grade Lismore. Having said that Id have the Templeton any day as in a bad year the difference becomes more marked.
I understand what is achievable for a top operator, and believe me, at those levels as you state, you are talking about a top 5% farmer if not top 2%. The relationship of value in terms of dairy farms is built around a standard bell curve of ability of the farm, management and resources to produce.
What we are talking about is average efficent. This average efficent level is not top 10%, nor is it at the other end of the spectrum, but rather the mid point of the upper end of the bell curve.
The best example of average efficent hypothesis is that at a hypothetical auction, the average efficent operators set the market, and the above average operator buys the property, as his (albiet maybe slight) advantage means he can extend to purchase.
I understand that your tope end guys can utilise more effectivly in paddock, but to say that an average efficent operator can produce 2000kgms on anything other than high feed inputs year in year out is incorrect.
The advantage gained from above average production is not reflected in market transactions, properties are inevitably priced on what a realistic opererator could hope to achieve. Given that we are seeing farms trade on benchmarks of $35 - $38 / KgMs or $47,000 - $53,000 / hectare, with many farms in this set having high (1700 KgMs / ha plus) productive levels, this confirms this.
The road of high output is littered with skeletons from the last two rural property cycles, lenders and purchasers should tread very carefully or risk becoming one of "those" operations sold at a rather large discount to where they were purchased at.
Thanks Diesel.
This is all good stuff and its good to see the application of valuation theory so clearly explained.
I would appreciate your comments in regard to establishing acceptable sales in regard to recent comparable sales value analysis. By this I mean excluding
related party sales say between family or existing equity partners,
distressed market sales say where the bank moves in, or the marriage has split.
sales where the property is chopped up into uneconomic parcels and divided amongst the buyer group to be added to existing holdings.
sales to non operators absentee/uninformed and institutional owners or where there are layers of management fees or complex ownership structures that remove ownership from operation by side contracts.
as these influence the $/kgms purchase price, you say $40, I say <$30.
And on our example. the buyer group appears to not the hypothetical buyer, it would appear they paid more $ than the hypothetical buyer would have but would make more profit than the hypothetical buyer (I have offered calc's as to how).
My point is people will pay up to what they can afford (including what they can borrrow and we each have our own cost/price/earnings view/profile) but not more than the next guy on the day. So its like a band. Mine is probably different to yours. And size does mattter (like houses anyone can buy for $225K, few can buy for $22.5m)
The valuation rule of thumb I do think of is: 90 day sales term. If a property is on the market for 90 days, the price you have is what it is really/actually worth now (not before when it was bought or conversion planned and not maybe in the future).
Hi Henry,
In terms of sales which have "other" aspects to them.
Adjoining owner sales / stratigic purchase sales often see a premium payed. This can generally be observed when an adjoining land purchase can be incorporated into an existing operation. In dairy terms there are lots of examples of this where a smaller block recives a premium as an adjoining farm has infrastructure (dairy shed / housing / irr system) allowing them to utilise the property with limited further development expendature.
Mortgagee sales are generally discounted unless the value benchmarks are consistent with current sales trends. In some instances, sticking mortgagee on a property confirms a transaction will take place and incourages buyers to commit. This sometimes sees a premium paid. However, in many mortgagee situations there are a number of contingent liabilities or a limited market which often sees a 10 - 20% discount on market value.
The third you mentioned is underlying subdivision potential. This can be determined by a reverse hypothetical subdivision model. However, the market tends to be a bit less technical and what you tend to talk about is smaller premiums for location unless it has an intensive and sought after undelying subdivision potential.
All part of the "basket of sales". Analyse these correctly and differentials will become more obvious. The outliers (for whatever reason) will become clear.
Totally agree on scale. Over 85% of the dairy market is under 250 hectares, thin buying power at the top end and a more yield focused approach.
The best way to circumvent arguement on per KgMs or productive measures is to say, ok, we dont share the same view on that, lets revert to a per hectare measure. Operate within the known per hectare benchmarks on a broad basis and go from there.
I fear that through this conversation I may have outed myself as to what I do for a living!
The problem is that large corporates are taking advantage of cheap money and developing large scale operations, in low cost economies with which we cannot compete.
http://www.agrimoney.com/news/syngenta-joins-scramble-to-tap-benign-bon…
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Falling interest rates destroy capital as they increase the burden of debt contracted earlier at higher rates. Perfectly sound businesses fail if their debt burden, through no fault of theirs, exceeds the profitability of deployed capital http://www.agrimoney.com/news/germany-and-ireland-lead-dip-in-eu-milk-p… Stephen Hulme wrote this on Fridays 90@ 9, A more disturbing factor was revealed in yesterday's GDP data - the nominal annual growth of expenditure on GDP fell to 4.84%, below the 5.46% current average cost of servicing outstanding government debt.
Inflating away debt could be over if the economy remains on a lower growth track for an extended period. This development makes real positive debt repayment costs a painful pastime for individual and collective debtors. We probably need to seriously avoid debt from here on in.
"avoid debt" yep....hence the risk that deflation posses. You (not "you" btw andrewj) borrowed say 100million plus interest to do something productive ie produce a good but now find that you cannot get the raw materials at the price you thought, your energy costs are way more if you can get it (I expect petrol and deisel shortages) and you are not selling as much as you expected.....but the Govn will want to put up taxes...and with that level of debt you have no room to manouvre until [some of] it is paid down.....and of course you kicked up stink whenever the Govn tried to make NZ more resilient....
An example is dairying, In more and more cases they have or plan to use copious quantities of water and fossil fuel based fertilzer to make land not well suited for dairying perfom as tehy "expect".
Of course in NZ you have loaded yourself up with debt based on say the high milk solids price to dodge tax hoping for a tax free lump sum on retirement. Makes perfect sense in a steady growth environment that was promised...which we dont have any more.....but hey you listened to the market forces mantra that said what you were doing was right.....
ouch.....
Some ppl I have sympathy for.....many though I think have brought the coming hard times on themselves....for those I wont shed a tear.
regards
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