«To buy or not to buy» – that’s the question on dairy farmers’ minds as they weigh up whether now is the right time to invest in some rural real estate.
Milk prices are up, land values are flat or falling, cow prices trending down, interest rates low and Fonterra shares in decline – all ingredients for dipping a toe into ownership.
MARK TAYLOR STUFF NZ
Mark and Cathy Nicholas have just bought their first dairy farm.
«There’s a lot of opportunity out there. We looked at over 20 farms and we became pretty good at doing budgets quickly to figure out if a farm could work with the budget we had. We put offers on a few of farms which weren’t accepted, before finding the Tirau farm where our offer was accepted through the tender process,» Mark and Cathy Nicholas say.
Even so, it would not be everyone’s choice of a career. For a start there is the early morning milking, the isolation, uncertain markets and the constant criticism from townies over water quality.
Not only that, but one of the main reasons for getting into farming has changed. Traditionally farmers have accepted the downsides of their job in the knowledge that when they retire there will be a substantial capital gain after they sell the farm.
No longer, according to Dairy NZ economist Matt Newman.
«If they’re hoping for the capital gains that previous generations achieved then they’re going to be disillusioned. Land values are the biggest asset and capital gains have pretty much dried up after the downturn. Values for good land are holding up but marginal land prices are going back.»
The downturn started in the 2014-15 season, a year after the price Fonterra pays its farmers hit an all-time record high of $8.40 per kilogram of milksolids. The next two seasons saw it drop to $4.40, then $3.90.
It might be a watershed moment for the industry. Cow numbers reached a peak of 6.7 million in 2014 but by last year had declined to 6.4 million.
The Reserve Bank, as it does every year, warns about dairy debt. Altogether agriculture debt is $62 billion, with dairy at $41.5b, sheep and beef $14.1b and «other» including horticulture $6.3b. Four years ago dairy farmers owed the banks $34b.
But where banks were once eager to lend to farmers with few strings attached, they now cast a stricter eye over budgets.
Michael Woodward and his wife Susie, who have just made the shift from Canterbury to Otorohanga, agree banks are more cautious.
«But they’re also looking after their clients better. Managers are getting to know clients better, I know managers who if they think it’s a bad idea they’ll put it to their clients, whereas in the past it was more around growth and the capital gains and saying ‘we’ll take a chance and possibly push it’.»
In fact the Woodwards would have bought their 170 hectare, 350-cow farm sooner if the bank had not advised against it. They have been sharemilking for 15 years.
«Our manager said a year ago, ‘no you hold off, you’ll make more cash if you stay in your sharemilking job’. We had identified a property but we worked through the numbers and they made it quite clear the payback from that farm was going to be longer than on this farm, and would have required too much hands-on. Now we’ve got a buffer if the payout drops. It was about us not being stretched to the limit,» Woodward says.
Even though land prices have not ballooned out in recent years, they are still more expensive than when the Woodwards began sharemilking.
«Cows just don’t buy you the land they used to. It used to be that you’d sell half the herd and use the other half for milking, now we’ve used about three-quarters of our herd to buy the place.»
The Woodwards did not buy prime Waikato land but that was down to choice. Michael says they did not want «wall-to-wall» cows, so have an area that is not milking quality where they run some dry stock.
For now Woodward has «parked» his advocacy work with Federated Farmers while the couple get the farm up and running but he hopes to take it up sometime soon.
Nicholas says he and Cathy had been 50:50 sharemilking for 10 years, with the last six years milking 700 cows on a farm near Tokoroa before purchasing the 120-ha farm where they now milk 280 cows.
«In all our farm budgets we didn’t put in any capital gain, we put nil. We worked on the fact land values could come backwards. My dad also reminded us that when he was farming, at one stage interest rates were over 20 per cent. Today sub 5 per cent is good but once you put 7-8 into your budget, things become very marginal.»
Newman says for some new entrants, now may be as good a time to buy as any.
One measure of dairy values is the price of Fonterra shares, which farmers must buy if they want to supply the co-op.
A farmer with the average herd size of 431 cows, producing 158,000 kilograms of milksolids a year, pays $587,760 for Fonterra shares today, whereas at the beginning of 2018 the price would have been over $1m
Fonterra pays its 10,500 farmers $6.75kg/MS, out of which they pay working expenses, interest, rent, and income. Not included are one-off capital replacement items, such as a new dairy shed, which are replaced only every few decades.
«Dairy NZ’s current break-even milk price is $5.95, which leaves farmers with 80c per kg, of which 40c is depreciation, resulting in 40c per kg they could put into their back pocket, or into the bank for a rainy day, or to pay down some of the principal on the money they have borrowed.
«Based on average dairy farm production, this 40c per kg amounts to $64,000,» Newman says.
Prospects are uncertain for next season. Fonterra has forecast it will pay farmers a range of between $6.25-$7.25 kg/MS. In the past it has been criticised for picking a figure, and then having to change it.
The average break-even over the last 10 years is $5.75, which offers farmers a reasonable guide to future, Newman says.
Woodward says compliance is the hidden cost of dairying. Effluent systems can cost in the hundreds of thousands but he recognises the importance of getting the right advice and not living in the past, as some farmers do.
Nicholas believes it’s vital for the industry that the familiar route into ownership via sharemilking be maintained. Over the past two decades, sharemilker numbers have fallen from over 5000 to below 4000.
«In the past everyone was given an opportunity [to own a farm] but those are getting fewer and fewer.»