On Wednesday, agri-finance company StockCo Capital announced a $1 billion investment to fund a herd leasing service to help dairy farmers raise capital.
StockCo Capital general manager Will Purvis said farmers using the service will sell their cows to StockCo Capital and agree to lease them back, unlocking the capital tied-up in their herd.
That capital can then be used to invest in infrastructure, purchase land, fund other expansion activities or restructure finances.
“It is no secret financial institutions are becoming increasingly cautious around farm lending,” Purvis said.
“It is estimated 30 per cent of dairy farmers are classified as being highly indebted and, despite firm milk prices, the Reserve Bank is encouraging banks act prudently with farm lending and work closely with their existing dairy farming customers to ensure they are well positioned in the event of a future downturn in the sector.”
Combined with the economic impact of Covid-19, a surge in demand for financial capital, and a limited ability for tier-two institutions to fill the gap, it is becoming increasingly difficult for farmers to raise the funds they need to maintain and grow their business, he said.
“This is constraining growth within the broader dairy sector. We believe herd leasing can help individual farmers address this situation by allowing them to unlock the large amount of capital they have in their herd.”
Purvis said the leasing service, initially open to Fonterra farmers, is not aimed at farmers who are highly indebted but at those who are financially sound but finding it difficult to raise capital.
During the lease period, farmers will keep control of the leased herd and generate income from milk production and the sale of offspring.
They will also be able to deduct the lease payments as a taxable expense. By following the best-practice culling and herd replacement procedures built into the lease agreement, farmers will own the herd on their farm at the end of the lease period.
Purvis estimated that the average dairy herd of 400 cows will release $625,000 of capital through herd leasing.
“This allows farmers to raise significant capital quickly without the need to sell shares, dispose of livestock, sell other property or increase indebtedness,” he said.
The leasing service includes features designed to support farmers, including lease payments being made during peak production, when cash flows are at their strongest.