I was most interested in the comments by Aquila on Agrimoney.com comparing
returns from Australian and New Zealand dairy farms.
Aquila made some interesting points in favour of Australia.
However, I believe that New Zealand remains the better target for investment.
Land prices – whether one country's land prices are higher
or lower than another country's is neither here nor there. It is the current
and expected long term sustainable economic returns that matter and on this
basis New Zealand dairy land prices quite justifiably need to be higher than
Notwithstanding this, figures extracted from Reinz charts
show that dairy land prices based on a per hectare basis are at the same level
as what they were in mid-2007 whereas the dairy farm price index is at the same
level as late 2006.
This is not the sign of an over-priced market, especially
when one considers how the global milk trade has performed.
As Aquila noted, New Zealand does not have stamp duty or
capital gains tax and this in itself also justifies a higher pricing.
Economic returns - In the past season according to Dairy
Australia figures, the milk payout received by farmers in Australia only went
up 25%. In export-focused New Zealand, it went up over 40% - and from a higher
And on performance, while New Zealand's dairy industry has
been going from strength to strength, Australia's has continued to slide
As Dairy Australia figures attest, from peak production in
2001, production has fallen by over 18% whilst New Zealand's has increased by
'Cheap for a reason'
There is also the question of exit strategy.
It can be a struggle to exit dairy farms in Australia as
anecdotal evidence of farms under bank control and farms that have been on the
market for years show.
I note Aquila's intention to buy farms in Tasmania and
Victoria. I know that farms have been on the market in Tasmania for years with
some current owners reducing their book value each year. A recent article in North Queensland Register
noted that there is "an oversupply of dairy farms for sale in Victoria".
While entry may look cheap, it is cheap for a reason and one
needs to be very cautious and factor in a more realistic exit price, including
It is also interesting to note that even the Chinese, with
their drive for food security, have have recently walked away from some
'At the mercy of the supermarkets'
Turning to climate, New Zealand has a more reliable climate
for growing grass, and therefore relies less on purchased feed, and has access
to the high volumes of water required for dairy farming, even after factoring
in climate change. For any long-term investor, these are important
And on industry structure, New Zealand has a unique industry
structure that allows farmers to have a direct and transparent exposure to
global dairy prices.
By contrast Australian farmers are at the mercy of the local
supermarkets that effectively cap the returns that farmers can achieve. For the
portion that Australia exports, New Zealand farmers are also beneficiaries
through their ownership of Fonterra (a major exporter of milk out of
In other words, an investor can gain an exposure to the more
profitable part of the Australian milk trade by being a Fonterra shareholder
farmer in New Zealand.
Furthermore, Australian labour costs are higher and less
flexible. Milk processors in Australia have recently been pleading for
Australia to adopt New Zealand rules that that allows for work hours to
correlate to seasonal milk production.
In summary - the world needs Australia to do well in dairy
and as such investment is to be encouraged and Aquila is to be commended for
its courageous plans.
For an investor looking for a more compelling risk/return
balance, New Zealand remains the more compelling proposition.
The author is an international agricultural investor with interests in both Australia and New Zealand
What do you think about the relative benefits of Australian vs New Zealand dairy investment? Or are there better prospects outside Oceania altogether?
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