Returns from NZ Farming
June 2010
What returns investors can expect to generate from New Zealand farming and how are they structured?
Dairy
The majority of MyFarm investment opportunities are Dairy because:
- The global demand outlook for milk products is excellent; growing at >2% p.a. with much of the extra global milk supply likely to come from established, high production cost countries.
- New Zealand’s key comparative advantage is low cost milk production which enables dairy farming to generate good profit margins as milk prices increase.
- New Zealand has a strong, integrated Dairy industry with shares in Fonterra, the world’s largest and most efficient dairy company.
- It is possible to replicate a simple farming system from farm to farm, reducing risk and management overheads.
- Reliable and regular cashflow
- High levels of productivity potential supported by an internationally acclaimed on-farm Research and Development industry here in NZ
Asset composition
Dairy farming assets comprise land and buildings, plant, stock and co-operative processing shares (when supplying Fonterra). The investment of $9 million in a typical 200Ha South Island farm is represented by 73% in land & buildings, 10% in the dairy herd, 5% in dairy and other plant, and 12% Fonterra shares.
Farm operating income and costs
Milk income is received on a monthly basis but spread up to 15 months after supply, providing regular cashflow and helping moderate payout fluctuations from year to year. Each season’s milk income will vary largely according to international commodity prices, the exchange rate between the NZ and US dollar, and the processing company’s profitability. Milksolid returns to farmers show income has increased on average by 3.5% (13 cents/kg Milk solids per annum since 1983). Taking the trend for this line, plus adding returns from the sale of surplus stock, gives sustainable forecast incomes of $5.25 to $5.75/kg Milk solids. Typical operating costs (South Island) range from $3.30 to $3.80/kg Milksolids. The operating margin therefore ranges from $1.50 - $2.50 per kilogram of Milksolids.
Land price appreciation
A major component of dairy farm investment returns has historically come from land price appreciation. Although prices can fluctuate, land prices have appreciated on average by more than 8% between 1955 and 2007 - after inflation they have increased by more than 3% per annum.
Overall returns
Average New Zealand dairy farm returns have been in excess of 12% p.a. for the past 15 years, with increased profits capitalised into the value of farmland. Forecasts for the next 5 - 10 years are for average operators to achieve:
- Operating margins; 5-7% p.a.
- Capital value growth; 3-5% p.a.
MyFarm has a 20-year track record of achieving returns well in excess of average levels for funds and investors through;
- Buying undervalued quality assets that can achieve a 25% increase in production
- Achieving top 10% on-farm performance
- Tight fiscal discipline
Sheep and Beef
With better sheep meat and beef returns, drystock properties are of increasing interest when they are reasonably priced, summer safe, and where MyFarm can implement a simple farming system.
Currently sheep and beef farm property prices are to be settling with prices 20 - 30% below recent highs reflecting a more realistic outlook for the sector. With higher lamb prices at present, larger properties with development potential and diverse land use options are potentially attractive investment opportunities.
Recent beef trends driven by USA
Some analysts are predicting that cattle prices will reach new highs in 2010 and beyond. Traditionally in the United States beef has traded between US80c and US120c per pound. Recently the price for 95CL lean beef has hit US180c per pound. In the commodity boom in 2008 prices briefly touched US200c per pound.
Analysts predict a shortage of beef supply in the 2010 calendar year because as profitability returns to US beef production, a rebuilding of cattle numbers will begin. Feedlot placements are below expectations and recent reports have added fuel for a rally that's already sent Chicago cattle futures up more than 15 percent since the end of 2009. With the outlook for beef supplies tightening, cattle prices later this year are expected to climb further, and futures and deferred contracts are very likely to reach new highs.
Lamb driving optimism
New Zealand sheep farmers have reason to be optimistic in the medium term as the effect of fewer lambs available both domestically and internationally filters through into higher prices. This reduced global supply has softened the blow of the recession and as it continues, will create opportunities for the lamb export sector.
The best example of these opportunities is the European Union which accounted for about 63% of NZ lamb export revenue in 2009 and in turn, New Zealand supplied 85% of the lamb from non-EU countries. The EU produces 81% of its lamb, but in the past ten years sheep numbers have been steadily declining and production was 18% lower in 2008 than 1998.This decline is expected to continue at a similar rate, slightly faster than consumption growth and has led to forecasts of increasing returns for at least the medium term[1]
sourced from Maf - http://www.maf.govt.nz/mafnet/rural-nz/statistics-and-forecasts/sonzaf/
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