Agriculture has a chequered history of poor returns for outside investments in rural land and this article raises the question will the investment in Pastoral Dairy Investments be any better?
Returns in farming have historically been low and when fees and management costs are taken off the bottom line, these sort of operations historically have proven to struggle.
MyFarm 's executive director states that their debt free acquisitions set it apart from other ventures, but most farmers know that any development no matter how carefully planned, seems to always struggle to hold costs to budget. The question could also be asked ''Are milk products on a downward cycle of agricultural commodities driven by global increases in production and coupled with cost increases will margins be squeezed?"
Is the timing right for this sort of investment into the dairy sector and does the return reflect the risk? Share with us your optimistic or pesimistic views on the challenges this venture may face.
A month after Pastoral Dairy Investments' fund launch - seeking to attract more than $75 million to $100 million in start-up capital - analysts are still number crunching the details. Questions arise over capital gains issues, complex fee structures, estimates on some expenses and where Pastoral Dairy Investments (PDI) will offer value, when other investments such as NZ Farming Systems Uruguay, Tasman Agricultural and Dairy Brands left start-up shareholders out of pocket reports The ODT.
PDI estimates a yield of about 10%, pre-tax and fees, annually, with quarterly dividends to be paid through Fonterra's monthly payments. On one hand, demand for PDI's prospectus during its country-wide roadshow has prompted the potential for a second print run and more than 850 inquiries so far, while recent headlines reflect a strong global dairy demand which is underpinning the economy. However, in the South, financial analysts specific to the dairy sector are lukewarm to the idea of the PDI fund, its associated costs, fees and potential yields.
New Zealand is not alone in dairying achievements globally. The majority of other milk producing nations, except China, have all boosted milk production during the past year. With the fund closing date not until April 20, potential investors will be holding on to their cash and it will be some time before actual investor numbers and their extent is known.
MyFarm, which has its own separate 47-farm fund, will manage the PDI farm stable. Executive director Andrew Watters is one month into a gruelling countrywide roadshow, having made about 20 presentations to brokers, farmers and small investors. He maintained PDI's debt free farm acquisitions, a low cycle in farm prices, MyFarm's management experience and medium-term strong global dairy demand underpinned by Asia boded well for investment.
Historically, start-up investors in other companies have come unstuck. When NZ Farming Systems Uruguay and Tasman Agricultural raised money, the shares then traded at discounted rates respectively more than 20% and 38% below net asset values. While PDI had maintained the offer was medium to long term to get greatest benefits and should be considered illiquid, one analyst highlighted that the PDI fund would be so illiquid that if for some reason an investor had to exit in a emergency, they could be "well out of pocket".
Mr Watters said unlike PDI, those companies - and he also added in Dairy Brands - carried high debt levels on establishment, never paid dividends and in some cases used 50:50 sharemilkers who took more than 50% of profits. The Farming Systems Uruguay model, while "pioneering", was based on cheap land overseas and on an unproven business model with no track record.
He rejected the suggestion that, while the fund was subject to a wide number of variables which could affect dividend yields, the fee-take for PDI remained relatively static.He said the supervision fee of 5% based on the milk price would be less for PDI if prices fell and the 12.5% earn-out payment for PDI at the point of farm sale was subject to that farm having gained shareholders a pre-tax internal rate of return of at least 8%.
6 Comments
This is one of many ways to think about things could be:
1. Look at the industry and figure out where volume and price are going.
2. Look at the specific quality and value of assets - can't be done as there are none yet.
3. Look at the structure - this is how money gets to hold the assets.
4. Look at the folk involved.
5. Think of ways the structure may change once money has been put in.
from the ODT link (which is a good read), the last paragraph:
If this is a time for would-be investors to take notice of the disclaimer "consult your financial adviser", go further and get one with exceptional agricultural knowledge.
Below is just about structure, it is copied from the their doc and may or may not be right, the bold are possible questions or not, this is absolutely not investment advice, I do not know what I am writing about.
The PDI Group comprises Pastoral Dairy Investments Limited and 25 Investment Companies.
Each Share held by investors comprises one ordinary voting share (nil issue price) and 100 non-voting redeemable preference shares of $0.01 each in Pastoral Dairy Investments Limited,
together with one non-voting preference share (nil issue price) in each of the 25 Investment Companies.
Ok, so 2 types of share in PDI the company and one type of share in a company [that is a member of a limited partnership - see below] that owns a farm?
In this Offer, the Issuers will issue 25 million Shares plus oversubscriptions (of whatever amount the Board determines) at an Issue Price of $1.00 per Share, paid up on subscription to $0.30 per Share.
PDI’s investment in specific farm businesses will be via one of the 25 Investment Companies formed for this purpose. To fund investments, PDI will provide advances to each Investment Company as required.
The money that is invested in PDI is then loaned to a company in the farm owning partnership?
Until it is required for investment in an investee farm business, subscription money received by PDI will be held in interest bearing deposits at a registered bank or equivalent, as approved by the Board.
what is the equivalent to a registered bank?
By purchasing each farm through a separate Investment Company, PDI is able to provide an effective mechanism for delivering investment returns to Shareholders on a farm-by-farm basis.
As of the date of this Offer Document, it is expected that PDI’s investments in farms will be made through separate limited partnerships (one for each farm investment), in which an Investment Company will be a limited partner, together with the Manager, other co-investors and possibly the Farm Operations Manager.
the company that PDI lends the money to is then a limited partner?
the co-investors or terms upon which they invest are not included?
same said for the FOManager?
The general partner of each limited partnership will be an entity controlled by the
Manager, subject to the overriding powers of PDI described in this Offer Document.
in a partnership controlled by the manager (the manager is not PDI) the PDI is not the manager?
As individual farm businesses distribute earnings, return capital or are sold, proceeds will typically be returned directly to Shareholders, less any amounts needed to offset
PDI operating costs and to pay any applicable fees.
Distributions from Investment Companies will be paid directly to Shareholders via the Investment Company preference shares held by Shareholders. Any capital gain
from divestment of a farm will be returned to Shareholders by way of distributions on the liquidation of the Investment Company concerned.
The original cost of the investment in that farm will be returned to Shareholders by
redemption of the redeemable preference shares they hold in PDI.
Best case scenario you'll get 10% ROI. Worst case you lose 80% of your investment.
Compared to buying an actual farm, best case at least 10% ROI, worst case it makes a loss, but you still have a farm. There is no advantage in paying someone else to buy a farm for you. It's not something I'd ever consider doing, but a lot of people have no idea what to do with their money, and are happy to pay someone to do something with it.
The advantages of physical over paper, is that the physical has an intrinsic value and actual use, whereas paper has no intrinsic value and very little use. In a worst case scenario there is no substitute for physical ownership.
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