Time to invest in dairy

The Dominion Post | 08/06/2009

By JON MORGAN

The next six to 12 months may be the best time in five years to buy a dairy farm or a share in one, according to investment company MyFarm.

"It is the irony of the low milk payout forecast," Andrew Watters, a co-owner of AGInvest, MyFarm's parent company, said.

Fonterra has signalled a likely payout for the new milk season of $4.55 a kilogram of milksolids, a drop from last season's $5.20 and a huge fall from the previous season's $7.90.

Mr Watters said that was an ideal situation for investors.

MyFarm has 23 farms throughout the country in syndicated or equity partnerships of two to 20 owners.

"Strong fundamental demand for dairy products, along with depressed asset prices; combine this with a quality tangible asset that is a proven inflation hedge and dairy represents a very strong investment proposition," he said.

The global recession had not changed anything.

Long-term global demand for dairy products was forecast to double as the world population increased and demand rose as people became wealthier.

At the same time, the area of cultivable land was shrinking, 30 per cent of what was available for food production in the 1960s.

In New Zealand, dairy farmers were in tight financial constraints.

Many businesses would be cashflow negative over the next 12 months, with up to 15 per cent of farms not having enough capital to continue ownership.

"For investors, this means there will be more high-quality properties available and more negotiable vendors."

Added to that, many of the most active buyers in the past two years, farmers looking to expand, now had little access to capital or credit, Mr Watters said.

"We forecast this supply and demand imbalance should see property prices return to levels last seen in 2007."

Good quality farms in Mid-Canterbury and central Southland would be selling at 6.5 times the milk payout at a time when the payout was expected to be at a cyclical low.

With payouts returning to the $5 to $6 range, cash returns from quality farms of 5 to 7 per cent were feasible.

Mr Watters said that though MyFarm was budgeting on a $4.55 payout, and even making allowance for it to be lower, it was also noting suggestions of a brighter future.

He pointed to predictions by analyst Agri-Fax of an eventual $5.10 payout for this season and by most banks of $4.80 to $5.

That would require an average exchange rate value of US58c and for milk product prices to rise by at least 5 per cent.

Even though the dollar was around US63c and dairy prices were falling, the most relevant part of the season September to December was still to come.

American milk futures prices were also optimistic, suggesting a 50 per cent rise in prices by December and a further 10 per cent rise to May next year.

"We don't personally know if milk futures prices relate to actual changes in the market but we will do some checking and it will be an interesting development to watch," he said.
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