Sunday Star Times | Sunday, 07 December 2008
By ROD ORAM
Faced with high land values and falling milk prices at home, a growing number of New Zealand dairy farmers are investing in South America, the United States, eastern Europe and Russia.
They are attracted by rapidly expanding dairy sectors and potentially more profitable business models. By comparison, it gets tougher each season at home to increase production and profitability.
These global trends were highlighted at the International Dairy Federation's summit in Mexico City three weeks ago and in its latest annual review. For example, New Zealand production of whole and skim milk powder rose just 4% from 2004-2007 while Brazil's rose 19% and Chile's 16%. World dairy production grew last year by more than New Zealand's entire output.
This pattern of rising production, consumption and trade of dairy products by developing countries and relative stagnation in developed countries is accelerating, according to the latest long-term joint forecast by the OECD and the UN's Food and Agriculture Organisation.
For example, in 2017 whole milk powder production by developed countries will be 85% higher than their average in 2005-07 and their skim milk powder output will rise 120%. In contrast, developed countries' output will be flat and up 20%, respectively.
The OECD-FAO forecast did, however, offer some hope for dairy farmers worldwide. It expects the collapse in prices this year to end next year at levels well above their previous long-term averages.
The price for whole milk powder, for example, averaged $US1920 per tonne from 2002-03 to 2006-07 before shooting up to an average of $US4170 in 2007-08. It believes the price will average just over $US3000 between 2009-10 and 2017-18.
The forecasters warn farmers, though, the unprecedented price volatility this year is a permanent feature of the sector. A number of factors are at work, such as the end of large-scale stockpiling by governments and the speed with which farmers in some countries can ramp up production as prices rise.
Moreover, the increasing globalisation of the industry means prices at the farm gate are converging around the world, the IDF says. Only a handful of countries, Norway, Japan and South Korea, remain decoupled from world markets.
Whereas New Zealand farmers received the highest unsubsidised milk prices in the world thanks to exporting, other farmers are catching up as they benefit from brisk domestic growth and their processors' growing export success.
While the overseas investment model looks simple, low land and labour costs and a decent milk price, that's only superficially true. Kiwi farmers are finding they have to significantly adapt their farming technology and management practices to make them profitable in other countries.
This is true even in Chile, where the soil and climate is similar to ours. It's an even bigger challenge in semi-tropical conditions, such as northeast Brazil. Very different economies, politics and cultures compound the difficulties.
However, while many of these investments are relatively new and have yet to reach their full potential, there is growing evidence New Zealand farmers are succeeding overseas. Moreover, this is turning into a true NZ Inc story. Not only are farmers, their advisers and agribusinesses such as PGG Wrightson, Gallagher and Livestock Improvement Corporation working well together internationally, diplomats and trade officials are deeply involved, too.
In Uruguay, for example, New Zealand diplomats have worked hard to get to know Uruguayan politicians and government officials. A number have been official guests here to get a better understanding of our dairying and rural life. On their return, they have been advocates of the benefits that Wrightson's substantial investment can bring to their country.
This relationship building will be critically important in 2009 when Uruguayans go to the polls. Two goals by some on the political left are reforms to help landless peasants and restrictions on foreign land investment along the country's border.
Wrightson says it is well accepted by Uruguayans and has no fears of being hobbled. Nonetheless, it is grateful for the diplomats' help.
In barely three years, New Zealand Farming Systems Uruguay, Wrightson's stockmarket-listed investment vehicle, has acquired 36,500 hectares of land and leases a further 3500ha. It has spent heavily on new pasture grasses, irrigation, roads, fencing, reticulated water supply to each paddock, milk sheds, staff accommodation, training and the other infrastructure needed to bring New Zealand-style pastoral dairying farming to the country.
It reckons it is already the largest dairy farmer in South America, and by the second quarter of next year, it plans to be milking 23,000 cows.
Competition has forced up land prices. The cost of buying and converting land to dairying is nearly double that of the first purchases. But a cost of, say $10,500 per hectare, is less than 25% of New Zealand prices.
Wrightson is hopeful prices will stabilise at less than 50% of farm income, say US17-18c on a milk price of US35c.
Wrightson has already spread its climate risk by buying in three regions of Uruguay. It's now looking across the border in southern Brazil where land is cheaper and more plentiful. Kiwis are also investing elsewhere in Brazil but the adaptation challenges are greater as they head north.
Even an established dairying region such as Goias state, southwest of Brasilia, is much hotter and drier than New Zealand. Land costs are roughly one-eighth but heavy investment in irrigation is required. Nonetheless, one Kiwi investment group that started up in the area last year expects to be cashflow positive in 2009 and to have recouped its investment by 2014.
Northeast of Brasilia, the high plains of Bahia state present bigger risks but potentially bigger rewards. Virgin land cleared, worked and ready to plant costs $900 per hectare, a local farm consultancy says, less than one-fiftieth of the cost here.
Dairying is new to the region but it has already attracted the attention of Dairy Partners of America, the processing joint venture owned by Fonterra and Nestle. DPA sends tankers on a 1000km trip around Goias state to pick up milk and is building a yoghurt plant locally.
A New Zealand group is building one of the big new farms. They acquired 15,000ha of land in 2001 and built the entire infrastructure from powerlines and irrigation to homes for staff and a school.
So far, they have four centre pivot irrigators and are planning another 12. The tropical pasture grass produces four times as much dry matter per hectare as the best farms in New Zealand, allowing quadruple the number of cows per hectare.
You can find similar stories of gutsy investments by Kiwi farmers in Chile. One day that will be likely true of Argentina. It has plenty of land and agricultural infrastructure to support a big increase in dairying. But the country's continuing economic and political crises are deterring Kiwis for now.
A number, though, have done the ground work. They know exactly where they will buy when the time is right.
* Rod Oram travelled to South America in September with help from the Ministry of Foreign Affairs and Trade.