Dairy the choice of investment options

I heard the head of one of our (Australian owned) banks taking jokingly about Global Financial Crises 2 this week.  No one thinks that is what has happened but financial markets were certainly "spooked" and further turmoil seems likely to occur.

As a (dairy) farm investment business we are acutely interested in how our investments will perform and whether or not there is demand for new product in the market.

The case for dairy farm investments has been much-repeated over the past six to nine months and has been based on a mixture of attractive returns and a strong demand outlook.  But what might have changed?

Rabobank's August Agribusiness Review and the NBR from 12/8/11 both shed interesting light on this question.

Firstly, in its analysis of Dairy, Rabobank note that dairy commodity prices have been weak in July, but expect them to firm "as key buyers are likely to re-enter the market in September".  They cite the example of India who has provided for the tariff free import of an extra 20,000 tonnes of milk powder.

They summarise by stating that "tight fundamentals across the global dairy market are expected to persist,supporting current average commodity price levels in the short term and lowering the likelihood of significant price falls.  Further weakness in commodity prices is possible, but falls will be limited by demand returning in key import markets - most of which are experiencing increased purchasing power in US dollar terms".

Given the level of likely forward cover held by Fonterra, and the high prices for product already contracted for sale this season, the current milk price is looking relatively secure.  For the whole report see http://www.rabobank.co.nz/Research/Documents/Agribusiness_review/2011/Rabobank_Agribusiness_Review_Aug11.pdf

The three NBR articles from 12th August provide a case for investing in dairy.

The first, titled "Cash Investors Face Long-Term Losses In Inflation Trap" quotes Mark Brooks from NZ Funds Management who says "bank deposit rates are likely to remain low for years, leaving NZ fixed interest investors exposed to the ravages of inflation".  The article goes on to say, "one of the challenges is to find solutions for those with capital to protect against inflation".

With reasonable land prices and very good commodity prices dairy farm investments (in the South Island) are returning 6 - 8% p.a.  In addition farmland has traditionally performed very well during periods of inflation; at MyFarm we would advocate that we have the answer to the NBR challenge, at least for a portion of an investor's portfolio.

The second NBR article "Kill the subsidies, cut the debt' by Rob Hosking, refers to the NZ$94 billion p.a. farm subsidies in the EU and NZ$10.6 billion p.a. paid in the USA.  With public debt and government budget deficits under intense scrutiny the western world is likely to see lowering subsidies and agricultural production rather than more - a great outcome for NZ farmers.

The final NBR article "Surviving a really long bear market" makes the case that the current turmoil is an episode in a long bear market.  Neville Bennett reckons that it has been hard to make money in stocks since 2000.  "If $1000 had been invested in the S&P (USA) in March 2000, it would, cum dividends, be worth $1083 in July 2011" (less now). 

By comparison, using Dairy NZ Economic Survey data shows that $1000 invested in 2000 would now be worth $2255 today. 

Farm investments still look very good, and in comparison to other alternatives, look even better.  With such a great outlook, can you afford to miss out?