Dairy farm investment out of reach of families

An equity market for dairy farm investment is needed as capital requirements take investment out of reach of families and those other than the very wealthy.

Dunedin rural economist Ray Macleod of Landward Management, also warns that some existing investment vehicles for the dairy industry may not be what people think and not suitable for short term or smaller investors.

At a time when the dairy industry wants investment and was reliant on banks who were more cautious with their lending, smaller investors were also looking to invest in our biggest and most successful industry.

But, Mr Macleod said there was no structure which had easy entry and exit for those investors, unlike equity partnerships which tend to have a predetermined lifespan.

The industry was becoming more attractive as global demand for milk drives up the price, and Mr Macleod expected more investment opportunities to develop.

He said existing investment vehicles tended to offer shares in a private farming company which was viewed by many as buying a piece of land.

In reality all they were buying were the same rights as shares in any public or private company.

"The [investment] industry tends to be intimating that security is around the land, but it isn't," he said.

"All they have got are some fairly illiquid shares."

If investors were minority shareholders and if they wanted to exit, the price they received reflected that minority status, said Mr Macleod.

This also relied on their being a pool of investors wanting to buy those stakes, he said.

"Our experience is if you want to sell your minority stake in an over-leveraged dairy farm, you are going to sell at a discount. You are a shareholder and do not get the protection from proprietary rights conferred by the land," he said.

Mr Macleod has seen some farm share valuations prepared for investors which he said were inadequate.

He stressed potential investors look at three years of annual accounts and pay particular attention to cost of production and revenue and also the quality of farm management.

There was a need for a rural equity market to be established, such as publicly listed companies or a bond market, but he believed equity markets had an "Auckland focus", that did not see the primary sector as something to invest in.

Such a market could also allow investment in Fonterra and the chance to share in its dividend stream, something at present only possible for shareholding suppliers.

The dairy industry was weighed down by a big portion of the $47 billion of debt held by the rural sector, and Mr Macleod said some of that could be exchanged for off-farm equity.

With the scale of individual dairy farming operations increasing, Mr Macleod said pressure was being felt on the traditional family ownership model.

It was not just rising land prices that was putting pressure on that traditional model, Mr Macleod said.

He said farmers needed to pay closer attention to costs of production and returns those costs were generating.

Lenders would demand future farm debt be backed by proven performance and not capital gain, which he said was unlikely to return to levels seen previously.

Mr Macleod believed the traditional family-farm model could tap in to some of this off farm equity, but those farmers would need to change their mindset and accept they will have to give up some control and answer to investors.

This will mean paying dividends to investors and creating an appropriate company structure that allows for equity partner input.



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