Farm investments are subject to a number of risks. Various uncertainties such as the weather, production levels, prices, government policies and global markets can cause swings in farm income and profitability.
It is MyFarm’s view that the majority of these risks can be mitigated through a thorough understanding of farming and farm investments.
GENERAL RISKS SUMMARISED
Production risk derives from the uncertain growth processes of pasture, crops and livestock. Weather (too wet and too dry), disease and other factors affect the quantity and quality of animal production.
Price or market risk refers to uncertainty about the prices producers will receive for commodities or the prices for inputs. Often dairy commodity prices are linked to the price of oil and inputs (grain and fertiliser).
Financial risk results when the farm business borrows and creates an obligation to repay debt. Rising interest rates, the prospect of loans being called by lenders, and restricted credit availability are aspects of financial risk.
Institutional risk results from uncertainties surrounding government actions. Tax laws, environmental rules, the level of overseas subsidies are examples of government decisions that can have an impact on the farm business.
Human factor this refers to problems with health or personal relationships that can affect the on going performance of the farm business.
MyFarm has adopted a number of policies that mitigate the major risks of a farm investment through;
Targeting investment into an industry that has strong fundamentals. The NZ dairy industry is benefiting from a strong demand outlook, has a low cost operating structure, very strong year-round cashflow and vertically integrated structure provided by Fonterra, New Zealand’s largest company.
Targeting quality assets. Farms that have a favourable climate, quality soils and a location close to a major town tend to perform well, to be more reliable, to attract better staff and are easier to sell at the end of the investment period.
Limiting borrowing. MyFarm syndicates utilise 33% or less bank borrowing. This is because lower levels of debt enable syndicates to pay dividends consistently, lower debt reduces financial risk and a strong balance sheet enables syndicates to consider expansion onto neighbouring land.
MyFarm’s due diligence includes key questions at purchase including;
· Is the effective farm area accurate?
· Are buildings fit for purpose and maintained?
· Is there sufficient water?
· Are production projections realistic?
· Are development plans likely to meet budget?
Employing good people. MyFarm appoints career farmers with a good track record of performance, proven ability to communicate and goals that align with syndicate investors.
Rigorous business management. This includes budget preparation, implementation of best practise purchase procedures and ensuring management is achieving both production and cost control targets.
Excellent communication. MyFarm operates on a ‘no surprises’ policy. Milk production versus target is reported every 10 days, every month investors receive a supervisors and farm manager’s report and every quarter there is a major review.
Risks to the business should be regularly discussed at quarterly Board meetings with the manager (MyFarm Management) asked to take steps to minimise or exclude these risks.
FARM INVESTMENTS ARE GENERALLY LOW RISK
Despite the formidable list above, land is a tangible investment with productivity and value that improves over time.
In a study of July 2011 the Australian Business Group noted that “returns from top agriculture are substantially less volatile than Australian shares, listed property and international shares”. They also note that agricultural assets are not correlated to other asset classes and provide a strong inflation hedge.