This story makes us think about future ownership of rural land, and ask what are the structures that will allow it to survive in the future.
To survive in a market where farmers tend to be price takers, and production and performance is often determined by the vagaries of the weather, operators often have to be conservative in their approach to survive.
Higher levels of debt increase the risk factors in management decisions, and make operators vunerable when the weather or markets turn against them.
Are equity partnerships the way of the future that allows partial ownership of working operators, to be combined with outside investors, that can run a farm with low debt?
Times are changing and capital growth in the future may not be as important as good productive returns, which is less risky with low debt.
Dairy farms with moderate debt are generating good cash flow right now, strengthened by last week's $6.10 payout announcement from Fonterra, according to MyFarm director Andrew Watters ' "In fact 2009/10 has been a profitable year on South Island-based MyFarm syndicates. "For example, the average MyFarm Southland dairy farm is generating a margin of $2.70/kg MS prior to debt servicing which is a return of more than 7 per cent on total assets," he says.
MyFarm is a private rural asset management company with 31 farm investment syndicates in New Zealand and Australia, which it manages on behalf of investors reports The Bay of Plenty Times. Most of these are partnerships between the on-farm equity manager and the off-farm investors. Since 2000, earnings on the average South lsland dairy farm before interest and tax had been a relatively consistent 44 per cent of the payout, with the profit margin ranging from 30 per cent to 55 per cent of total income, Mr Watters says.
"Take away the issue of debt funding and Canterbury and Southland dairy farms have been consistently profitable over the past 10 years." He says increases in average prices at Fonterra's global DairyTrade over the past six weeks are another good signal for healthy farm cash flows. He predicts this will mean many of the dairy farms caught with high levels of debt will be able to work their way through this season "in an orderly fashion and there won't be a flood of farms into the market, as some commentators suggest".
"Investment interest in quality, low or no debt investment propositions is strong because of this unique situation where farm cash flows are very healthy, and yet farm values are subdued because of a lack of capital and tightening credit criteria."
17 Comments
It is an option for those outside the industry to invest in it. MyFarm do factor capital gains in to their returns. Some of this is as a result of increasing production and some of it is an expectation that there will be a genuine capital gain in farmland.
The returns however are not that different to those reported in the MAF Farm Monitoring report for 2010 for Southland Dairy Farms.
Key points- Milksolids production per cow and per hectare were similar to the 2008/09 year despite low pasture production in 2009/10. Farmers are budgeting to increase milksolids production by 4 percent in 2010/11.
- The increase in milksolids payout saw net cash income increase 28 percent compared with the 2008/09 season to $1.365 million. A similar net cash income is expected in 2010/11.
- Farm working expenditure per kilogram of milksolids decreased for the second year in a row as farmers responded to an initial very low predicted payout. The model spent $3.18 per kilogram of milksolids on farm working expenses, which is budgeted to increase to $3.32 per kilogram of milksolids in 2010/11.
- Farm profit before tax increased to $383 200 up from $3500 in 2008/09. This sharp increase was driven by the increased final milksolids payment and a concerted effort by farmers to reduce their farm working expenses. Farm profit before tax is budgeted to decrease 7 percent in 2010/11 to $356 800.
- Farmers welcomed the increased payout but remain cautious spenders for the short term. The lack of farm sales indicates less willingness to take on debt.
http://www.maf.govt.nz/mafnet/rural-nz/statistics-and-forecasts/farm-mo…
The myfarm guys seem to be backing up my assertion that the "crisis" headlines that we get served up here on a regular basis seem overdone.
The dairy job seems to be ticking over just nicely thank you and their prospects are frankly excellent . I recon when you look at the incredibly uncertain investment enviroment at present, someone with some spare coin and a reasonable timeframe could do alot worse than a dairy farm EP.
For some balance to this advertorial I would like to hear something from those who have invested cash into dairy equity partnerships over the last 3-5 years. Given the purported returns there should be no shortage of them prepared to tell us how well they have done from their (North Island?) dairy investments.
Sweet as AJ, I like a good champers on occassion! Not sure if you are referring to Myfarm specifically or as a proxy for the market as a whole? I cant comment for myfarm but I just dont see where the overall "crisis" is while payouts are ticking over in the $6 to $7 range. My perspective is based on having got close to converting during the hieght of the boom. I was doing the numbers on $4.80kg/ms which stacked up ok at the time and if I allowed myself to plug $6 plus in the budget the numbers were pretty dam good. My presbertyrian conservatism wouldnt allow me to put in $7 though!
I'm going to go off on a bit of a tangent here. Recently in the U.K. on holiday and a few days up in the Scottish Borders I received a bit more education on what the 'common lands' are there. My initial interest being sparked about the unfetered public access allowed over the 'common land' and farms for trail running and now biking. Well, the farm lands around the town we visited are held in trust by the locals. The farmers lease the land. I think such a model would have some positive benefits in that rather than a centralised philosophy that the RMA might try and be, the local communities take interest in, and can influence farming practises that may impact them directly. And held in trust, the farm land isn't farmed for capial gain, but a profitable return.
An interesting alternative.
Hamish I can understand why you think it may be a workable solution, but a key difference is the subsidies the UK farmers receive. Without these subsidies some of these trust farms would most definitely not be profitable.
Having said that there is something to be said to both sides educating each other about the impacts of one anothers actions.
Andrewj: Can I make mine a good Gibbston Pinot instead of Champers? Never really been a bubbles girl. :-)
Personally I couldn't imagine anything worse than being in a EP with a bunch of people who have only had to put up $250k (the minimum for MyFarm). The farm at the back of us was a EP with a mix of town and country. It had an EP manager. All went well until the managers wife decided she didn't like living away from family and wanted to move back north. The other partners weren't able to buy the manager out (the EP was about 18mths old when the problems started to arise) and eventually 2 years later the farm was sold at a loss.
Heard recently that a kiwi partnership with a farm in Chile is bleeding money. So much so that one of the EP who has 4 farms in the district he lives in, may have to sell 3 of them to meet his share of bolstering the coffers and no doubt the bank is wanting some sort of debt reduction. A year or so ago another partner had to sell his 'state of the art' NZ farm for the same reason.
SS you are correct - there are a lot of dairy farmers doing very nicely thankyou. Some of the big boys are struggling and some of the banks are struggling with the stupid lending they practiced while supporting 'big is best.
A friend was holding a discussion group day at their place. They are debt-free and in the hunt for a 2nd farm, but are conservative borrowers so haven't bought anything yet. Their bank manager knows he will be dropped when they eventually do get another property. When he heard they were having the field day at their place he offered to come out and provide a bbq lunch including refreshments. While accepting his offer, it would take more than a banger and beer for my mate to finance another farm with them.
Going to be interesting to see what happens down in Southland with lignite being to the fore of the energy/mining companies. One has thousands of acres bought up at (what is rumored to have been) 2.5 times the farms value and now leased back comparatively cheaply to the farmers. Another company is in the final stages of testing an area it has permits for. If the mining does go ahead a significant section (though not a majority) of prime Southland farming land could be taken out in the future.
Name the year, (How much does it cost)but I dont see much chance of me paying out. Most EP's tend to self destruct as equity is too hard to get out and management fees become a source of contention. I also suspect that dairy has just hit the top of the curve time for the roller coaster ride to resume. I see My Farm purchased a farm, in Taihape for winter Lamb fattening, wouldn't go there myself. I have some cautious mates with larger than average blocks doing OK, they have over 10,000 stk units.
The wine industry has a problem, its that wine stores too well, they say some wineries around here still have some 2001 to move and the warehouses are full. The stocks just grow and grow and she's just blown up, the banks are wearing some nice losses which they probably expect to recoup from a guy like you fairly soon.
No, I can't see you paying out either!
MyFarm has also purchased a dairy farm and is seeking investors. According to their blurb it is in a location which will not realise much capital gain'. So in other words it will also struggle to attract good staff.
They say there is some good wine being sold as Clearskins these days.
If banks are expecting to recoup some of their losses from me they will find that reality will not meet expectations. ;-)
You in the hunt for a farm?
Good comments guys, nice to get some constructive comments.
CO you're right about the dangers of EPs but I have a few mates involved in them and they seem to be going ok. I think you would have to be very careful whom you got in with and have the right structures and timelines in place.
As for the wine, I spent abit of time up in Blenheim a few years back during the boom years. There were lots of cockies up there that could get water, putting in vines. Many had been struggling through numerous droughts and regularly having to quit stock and would have to have had to borrow heavily. They were all contracting to the big wineries for a few years. I wonder how they are fareing now as many will have lost their contracts at the completion of the term. There could be a few forced sales up there.
They are in it up to their eyeballs Sheep Shag....they wish they had told the bank advisors to eff off....they are stuck in debt and cannot find buyers to provide the much dreamed about capital gain...The 'vineyards' are for sale right across the province. It has been a tough lesson for the foolish and one that has made dam sure the old coots who told the banks to bugger off..will never take on debt. A message they have drummed into the whole family. Bank managers are now rarely seen down on the farms in Marlborough...too many bullets flying. As for the Council...they have a policy of cooking up fees and charges in an effort to suck money from the rural sector...
There is one new service enterprise to mention...a firm specialises in removing vineyard infrastructure and returning land to stock use...and the Council probably demands a resource consent for this to happen...kaching!
I know Grape growers locked into contracts at below cost! Hurting is an understatement, chainsaws are out. Mr Apple will be a hard sell if the $ stays this high also some of his orchards are in marginal areas.
Went into my local town to buy my daughter a tennis racket, the shop owner said "some days no one even comes into the shop". Rural NZ is hurting as any profits go straight to the banks.
I watched on TV as workers complained about wages and the like, just the beginning I think. Ignorance is bliss. How do they think they can compete against Chinese and other Asian workers? What answers do they have?
How would you like to be in book publishing?
http://blogs.telegraph.co.uk/technology/adrianhon/100005867/your-time-i…
Times are a changing, just got my first kindle Kindle busy downloading free books
You need a led light to read at night but its ok my wife doesn't even know Im reading you can get the lights off ebay. I got my daughter in the States to buy mine to get around copyright. It appears that if its purchased in the USA you get more choice, I had to get her to set a new email and Amazon account up for me. Ive since found sites like this
http://www.gutenberg.org/wiki/Main_Page
and this
http://www.43folders.com/2008/06/06/free-books-your-amazon-kindle
I will let you know in a few weeks how I get on.
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