Dairy land price floor reached – investor

The price of dairy land may have bottomed out, accord to a farm investor.

MyFarm director Andrew Watters said Fonterra's announcement last week of a 55c a kg of milksolid lift in the forecast payout for the coming season may have put a floor on land prices.

His investment company has recently been active in the market, taking advantage of prices which he said were up to half their peak of 18 months to two years ago.

Mr Watters said that as with the land price correction of 1987, the price of quality farms had fallen 10% to 20%, while poorer quality properties had dropped 50%.

A top farm in Central Southland that 18 months to two years ago was selling for $40 to $45 a kg/ms, was now making $32 to $35 kg/ms.

Two years ago, Mr Watters said, MyFarm was struggling to afford to buy dairy farms.

Now they can be bought for a price 14 times the earnings before interest and tax (ebit) and be viable on a payout between $4.10kg/ms and $4.20kg/ms.

He had heard many farms were on the market.

Not all were listed, but the number of those that were advertised appeared to be typical for this time of the year, with few in the desired South Island dairying regions of Mid Canterbury and Central Southland.

Fonterra's 55c a kg/ms forecast increase had taken the pressure off some farmers and Mr Watters said there was some confidence, evident in the ease with which he had been able to draw syndicates together.

He had just completed a $7 million 14-investor syndicate for a 255ha farm at Waihopai in Southland and he said it came together quite quickly.

Last week, he bought a 205ha farm at Roslyn Bush and was compiling a syndicate.

Meanwhile, Dunedin rural accountant Craig Wyatt said that while dairying was cyclical and good times would return, farmers needed to talk to their advisers and identify areas where they could cut costs to get through the current difficulties.

"Dairying is cyclical, so it is no different, except it is a heavily geared-up industry."

The National Bank is advising dairy farmers to treat cash as king.

For too long, farming has been driven by capital gain, but in a recent Rural Report the bank warned those rates of return might not be repeated for some time.

While capital gain has been "a partial saviour" of the financial performance of agriculture, the bank said it had been at the expense of adequate cash return, and the financial strength of the business had eroded.

"Increases in value have exceeded the growth of profits to the point where capital gain has dominated the overall return. Capital gain should be more related to the underlying profit."

The financial crisis illustrated the need for a change in attitude to one where cash was king.

"The business should have cash-economic returns that cover the cost of capital, liquidity and a spread of maturity dates for repricing/repaying debt."

Improving profit margins, or earnings before interest and tax (ebit), would be difficult given increasing environmental restrictions, compliance costs and standing charges.

Growing a businesses's ebit was the result of higher prices, selling more products per hectare or lower working expenses but the bank warned the carbon emissions trading scheme (ETS) would make it more difficult for farmers to increase their ebit.

"There is no certainty that overseas consumers will pay any price premium for greener New Zealand product, let alone a premium sufficient to cover additional costs imposed on New Zealand pastoral production systems."

It suggested farmers focus on any growth in marginal costs and marginal returns rather than average costs and returns.

Traditionally farmers have tried to maximise production to improve financial performance, but the bank warned that could lead to inflexibility, stress and would require higher skills.

 

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