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Making good returns from Dairy

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This fact sheet considers the merits of various options for investors looking for quality returns from the agricultural sector.

AGRICULTURAL ASSETS

The options for investing directly into agricultural assets include;

LEASING:

  • Owning a farm and leasing it out gives an investor exposure to changes in land values. As returns and profits from farming increase, so does the value of the land.  Rent provides cash returns. 
  • However these returns are usually moderate and there is sometimes tension between the owner of the land who wants the tenant to manage the farm in a way that improves its long-term value verses the tenant’s focus on short term returns rather than long term productivity. 
  • In New Zealand the returns from the “buy then lease out” model is generally considered to be below what the average farm operator could achieve.

Operating a Farming Business:

  • Investing in a sharemilking Company (e.g. 50/50 sharemilking) or a contracting company can deliver strong cash returns.  However such businesses (of any quality) are hard to find and the investors will not participate in any uplift in land values.

Owner-Operator:

  • Investing in an operating farm business through buying the farm outright or through participating in a syndicate or fund managed by MyFarm gives an investor direct exposure to commodity returns, land value increases, increasing farm productivity and operating efficiencies. In the case of dairy farming, Fonterra shares make up 10-15% of the assets giving added exposure to returns from New Zealand’s largest company.
  • Under this direct ownership model revenues can be cyclical due to climate effects, and changes in commodity prices and exchange rates.  However these can be mitigated through purchasing the right farm, adopting a conservative debt structure and because input costs often fluctuate in concert with commodity prices.
  • Capital gains eventuate through the appreciation of farmland’s value and can be strengthened through development and productivity gains. 
  • Capital gain for farmland has been widespread; US farmland has increased in value by 6% p.a between 1992 and 2009.  In Australia grazing property values have increased fivefold between 1980 and 2009. 
  • In New Zealand Canterbury farmland has increased by more than 8% p.a. since 1954.

LISTED STOCKS

Although listed agricultural stocks provide a liquid exposure to agricultural returns they tend to have returns that are highly correlated to the stock market, in addition there are few quality listed agricultural equities available to the market. Investing in agricultural equities in fact may provide little exposure to increasing agricultural commodity prices.

FUTURES

Investing in futures only provide exposure to movements in commodity prices. Agricultural commodity prices tend to react over the long-term so an investor with exposure to agricultural futures could make losses in the short term regardless of underlying trends.

SUMMARY

A farm investment into land and the operating business provides investors with the best direct link to the returns available from agriculture. In the New Zealand context the dairy industry, and potentially high performance sheep and beef farms provide the most direct benefit from food demand trends in industries that are internationally competitive and have strong industry structures and proven cashflows.