Dairy market commentary

Thursday, 5 March 2020

We wanted to take the opportunity to comment on the most recent Rabo bank report (Afloat but drifting backwards) as it does help to inform the market, and the headwinds challenging our dairy sector just now and flow-on impact on the property market.

The overall message, however, of dairying being afloat and drifting backwards is too pessimistic in our view. The surge in dairy sales over 2013/14 season where 321 farms sold, is in stark contrast to 146 sold last season. 

This year, the industry may struggle to successfully conclude 100 dairy sales by the 30th of June 2020. Noting the median sale price over the previous five years has traded between $35,000 to $40,000 per hectare and changed little, even with the dramatic drop in farm sales, the market is still holding out for 2013/14 valuations.

Dairy farmers who wish to sell their property late this season or set marketing strategies for next spring will need to assess whether holding-out for past prices is in their best interest. In our view, a downward adjustment of 10-15% on current price expectations nationally is required to reset the market back to historic farm sales volumes. 

Dairy businesses continue to drive strong cash flows, and there are likely to be just as many in strong balance sheet positions looking to exit as there are those perceived to be under financial pressure. There have been very modest levels of forced sale ultimatums, and we doubt that will change too much this season given the underlying cash flows and current pay-out. This seasons drought will not be at all welcome and will put pressure on cash flow, but farmers still have a lot more options than $3.90 pay-out of 2014/15.

Balance sheet adjustments in livestock and Fonterra share valuations are happening all the time; hence relatively modest national adjustments in land values should not reflect catastrophic outcomes for the market and instead more a return to market fundamentals. 

Some dairy land was over-sold in times past, driven off momentum buying, often with very little due diligence. Today when farmers factor in; sustainable production limits, a focus on cash flow and the underlying yield, the conversation will be less about the price per hectare and more about the return on capital. 

Locational influences will always apply, but for many of the larger dairy systems, particularly those under shared ownership models, the fundamental drivers are all about a sustainable return. Not to say that owner/operators are not driven off returns either but they rarely value their own time and run their properties in a way, a larger business can never contemplate, given their driver to be 100% in control of everything in the business.

If we look at this Spring/Summer sales over the last four months (Oct 2019 to Jan 2020) we’d highlight Otago/Southland as a region that has successfully worked through a dairy pricing adjustment, total farm sales for that period equal $187m from 71 sales. Dairy being nine of those sales for $59m with price per hectare, ranging from $17,000/ha to $47,000/ha. 

Compared to the entire Canterbury/Waitaki Districts over the same period where only $95m of property has transacted from 50 sales with only one dairy farm sold and that was in Waitaki. So, with 1m+ cows in Canterbury alone, it is fair to say with no dairy sales concluded for the spring/early summer period, something might need to give, and that is likely to be the asking price of dairy farms, to reflect a more certain yield for purchasers.

Historically, a dairy farm purchase had a significant expectation of capital growth factored into it, today it’s much more about return on assets and any foreseeable impact on those returns as per the Rabo Bank report. We should not lose sight of the fact that returns per hectare from productive well managed, sustainable dairy systems, remain head and shoulders above the alternative land uses.

Through the foreseeable adjustment period, more marginal dairy areas will be retired from dairying be it for; environmental footprint, access to water or alternative land use options such as beef. So, with the anticipated reduction in dairy land area, it would be a bold forecast indeed to suggest that farm valuations over the next ten years will not appreciate in value, at least in line with inflation. 

Farm owners with a long-term commitment to dairying who choose to invest today with good information should stand to benefit as supply of dairy land contracts and demand for our sought-after dairy produce continues to rise. Our dairy sector is going through an adjustment like every other NZ primary sector, and we very much doubt it is going backwards!

Conrad Wilkshire

GM Rural, Property Brokers



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