Media Release - 9 January 08

Sharemilkers need to think carefully before increasing herds

Sharemilkers should consider realising the increased equity in their herds, and selling some cows instead of buying more, according to MyFarm’s Andrew Watters.

“At times of high payouts and high cow values, it is very important for sharemilking couples who are considering expanding to look carefully at their current equity.”

Andrew Watters is a former sharemilker of the year, with first hand experience of the cow price conundrum, which he himself faced in 2001.

“Like today, it was an exciting time to be dairy farming. The payout ($5/kg MS) was good and forecast to rise again and cow prices had just hit the dizzying price of $1300/head. We did our budgets and decided to take on the opportunity of a second 50/50 sharemilking contract.

“Three years later when we completed the 50/50 contract, the payout had fallen to $4/kgMS and we sold the second herd for just over $1000/head. We had made good cash profits during three years of farming that second property, but we had lost more than $100,000 equity in buying and selling the herd.”

The Watters have since progressed to farm ownership and believe the industry’s sharemilking structure has been an important pathway.

“But on reflection I think other business opportunities, in particular equity partnership, would have been better use of our cash and resources, back in 2001.”

He says the current record cow prices paint an even more dramatic picture for sharemilkers who plan to expand their herd.  For example, a couple contemplating moving up from a 400 to a 700 cow position will realistically face a bill of $750,000 for 300 cows, plus replacements, at today’s prices of $2500/cow. The risk is that in three years time the value of those cows will have dropped to $1500, resulting in a $300,000 loss of equity.

On the other hand, the equity of a sharemilking couple with 400 cows has increased from $500,000 ($1250/cow) to $1million ($2500/cow). But in three years time cow prices could conceivably be back in the $1300-$1500 price bracket. This means that unless those cows are sold now the gain of $400-500,000 will never be realised.

One option for sharemilkers is to sell some or all of their cows and buy into an equity partnership. Andrew Watters admits it can be difficult for young farmers to contemplate getting off the sharemilking career ladder.

“The conventional wisdom of our industry is that sharemilking is the best and fastest way to achieve farm ownership. But farm ownership by traditional means is becoming increasingly difficult and equity partnerships are a different, innovative approach to getting young people ahead in their careers.”

In today’s environment selling some of their herd and moving into an equity partnership either as equity managers or investors will crystallize the current value of a herd and increase the sharemilker’s investment in land, stock and dairy company shares.

MyFarm and its parent company, AGInvest, have 20 years experience at sourcing, developing and managing farms in to successful equity partnerships. Andrew Watters owns two farms milking 550 cows in Wairarapa and is a Director of MyFarm, which manages syndicates with 17 dairy farms across New Zealand milking a combined total of 11,000 cows.