Founder & Managing Director, CowBank Pty Ltd
|It is my opinion that the Australia dairy industry is poised for expansion and presents an exciting opportunity for farmland investment. In August 2012 Gary Helou, managing director of Murray Goulburn, the largest Australian milk processor, addressed the Rural Press Club and gave his vision of “quickly” growing Australian milk production from 9 billion liters per annum to 15 billion liters per annum. This expansion is achievable given Australia’s wealth of arable land and water and excess processing capacity, but will require a significant stimulation of financial and human capital. Debt capital is not a complete solution for transitioning to the next generation of farmers, let alone expanding the industry. With an aging farmer population removing considerable capital from the system, additional equity is required for industry growth and equity investment has an important part to play, in both sustaining and growing the Australian dairy industry.||
Australia has had a long history as the recipient of international investment, and agricultural land is a prime example. Unfortunately, foreign investment in farmland is becoming a highly emotive and political issue. Nevertheless, there is a place for new capital in the Australian dairy industry, be it from international or domestic sources. As Brian Wilson of The Australian Foreign Investment Review Board said, “The bottom line is that Australia needs foreign investment and in many ways, success in trade (with a country) brings interest in investment. China is currently our largest trading partner and the investment is following.” It is my opinion that because of Australia’s stable economic and political environment, its dairy presents an exciting opportunity for international investors.
The challenge for equity investors in the dairy industry lies in implementing a successful management model that achieves the desired balance between return and risk (volatility). My thirteen years of working with dairy businesses, as both a financier and asset manager, has made clear to me the technical complexity of Australian pasture-based dairy farming, which requires skilled and dedicated farm operators. My firm has had experience with all of the common management models ranging from employed farm managers, to share-farmers, lessee farmers and lease-purchase farmers, with a range of hybrid arrangements along this spectrum. In our view, the most successful management models are those that involve co-investment in the dairy farm whereby the farmer has “skin-in-the-game”. It is this common exposure to the financial performance of the farm that creates a mutually beneficial alignment of interests between the investor and farm operator.
Depending on the investor’s appetite for operating risk, share-farming and lease-purchase are the primary models that enable co-investment between investors and dairy farm operators. A share-farming structure where both parties are co-invested in the operating business is the preferable model for investors who are seeking the potential upside from operational returns and prepared to accept the associated operating risks, such as milk price, herd health/fertility, variability of feed supply and input price volatility. Investors can be more confident that complex daily and seasonal operating decisions are being carefully considered and managed by the farm operator when they have a shared operating profit outcome. Investors who are more attracted to reliable low-volatility returns may be more comfortable with a lease-purchase structure, where both parties are co-invested in the farmland, but only the operator is invested in the dairy operation. In this model, the investor is not directly exposed to the volatility of dairy farming profitability, but may capture benefits from indexation of land rental to milk prices and capital growth in farmland value. Both of these management models enable equity growth for farm operators, creating long-term, mutually rewarding partnerships.
The Australian dairy industry’s changing demographics and aging farmer population is creating opportunity for investors to capitalize on structural transition by engaging with the next-generation of farmers. With dairy farmland prices currently depressed (Land values are down 15 % from their peak of three years ago), the key to seizing the upside in Australia’s pasture-based dairy system lies in harnessing the skill and success of individual farm operators. In my experience, investors that enact a management model which delivers a co-investment opportunity will attract and retain the highest calibre dairy farm operators and motivate the delivery of targeted returns.
About the Author:
Rod Banks will be speaking on the topic of Australia/New Zealand farmland opportunities at the Global AgInvesting Asia conference in Singapore, September 25-27. To view his speaker profile and learn more about this event, click here.
Disclaimer: The opinions expressed herein are those of Rod Banks and/or CowBank Pty Ltd. They are not necessarily the same as the opinions of globalaginvesting.com, HighQuest Partners, LLC or its affiliates.