June 01, 2018
Dairy farmers in NZ have received mixed news over the past week. Most newsworthy of course has been the presence and spreading of Mycoplasma Bovis in New Zealand which had previously been one of only two countries in the world free of the disease. It has clearly been occupying the mind of both the industry and the government and has already been devastating for some.
As of yesterday afternoon, we now appear to have a plan. Although it is not a guaranteed outcome and will not appeal to all, I think that most appreciate that there is a plan and a way forward that will give us the best chance of eradication. In the meantime, it’s going to be a particularly tough time for farmers impacted, some of whom will be losing herds that have been bred over many years.
Of some consolation, a plan gives a little more certainty to farmers who might be considering investment decisions and it has been confirmed that those who are directly impacted will receive compensation. Those people will also need strong support and the wider rural communities will have a massive role to play.
On a positive note, last week dairy farmers supplying Fonterra learnt that their forecast farmgate milk payout for 2017/18 was forecast at $6.75 with an opening 2018/19 forecast payout of $7.00. There are strong fundamentals underpinning this forecast, including strong global whole milk powder prices, particularly for New Zealand product, the ongoing shortage of butter and a weakening NZD. Global milk supply has also slowed down due to some structural supply conditions in key production regions. The upshot is that if the 2018/19 payout, is in the upper $6 range, the average dairy farm profitability will average $2,060/ha against the 10 year average of $960/ha.
The profitability estimate is obtained from the most recent ANZ Agri Focus Of interest is the increase by 25c/kgms in ANZ’s medium-term FGMP forecast to $5.75-6.75/kgms. This suggests a more sustained recovery in the dairy market and you can read more about it in the link below.
For me this information is timely. Last week I attended the Chartered Accountants of Australia and New Zealand primary sector conference. One of the strong themes of the conference was the need for ongoing investment in the rural sector to ensure the sector continues to grab the opportunities existing across the global markets and grow sustainably. As well as supporting the generational transition of ownership as the demographics of farmers ages.
Like all investments, farming or direct investment in agriculture is not without risk. However it has generally outperformed more traditional investments over time (“like gold with yield”), it is a good hedge against inflation and returns are uncorrelated with those traditional investments.
As investment in agriculture from offshore reduces in response to the new governments view on overseas investors and bank credit tightens up, there is room for new groups of investors and new structures.
Personally, I’d love to see retired or farmers recycle their capital and knowledge back into younger farmers - the returns won’t only be financial, its an opportunity to help grow young individuals and the industry.
Ross Verry is CEO of Syndex and a shareholder. The views expressed above are purely his own. Please assess and research all your investment.