Owen Hembry

Business news editor of the New Zealand Herald

Smaller investors sought for dairy farms

Dairy product prices are expected to be volatile. Photo / Sarah Ivey
Dairy product prices are expected to be volatile. Photo / Sarah Ivey

The balance between the cost of buying a dairy farm and how much it can earn is the best that Pastoral Dairy Investments chairman Malcolm Bailey says he can remember.

Pastoral Dairy Investments (PDI) is looking to raise a minimum of $25 million through an initial public offering at $1 a share to invest in larger-than-average dairy farms, each with about 600-1000 cows.

PDI is also seeking co-investors for the farms, potentially charitable trusts and institutions, which could contribute about $50 million.

Bailey - who is also a director of dairy giant Fonterra - said the target for total funds was $75 million, with the balance between the two sources driven by the levels of interest.

Most of the farms are likely to be in Canterbury and Southland and could cost about $8-10 million.

"There's nothing exclusive about that [location] but at the moment that's where the prospects are probably closer to fruition for us," Bailey said.

"[We're] targeting farms where we can get some economies from their size."

Farm prices had come back about 20 per cent from their peak and the earnings from farms had been substantially higher in the last couple of years, he said. "The relationship between the cost of buying a farm and the earnings off the farm, it's as favourable as I can ever remember it being."

According to the Real Estate Institute of New Zealand the median selling price per hectare for dairy farms for the three months to January was $34,298 - down from $35,090 at the same time last year.

The average winning price in Fonterra's latest online dairy auction last month was US$3545 ($4275) a tonne - down from US$4540 a year earlier but up on US$3369 in February 2010.

The IPO is targeting mum and dad investors and could include institutions, with a minimum investment of $20,000.

"At the moment if you want to invest in a dairy farm you either buy one in your own right ... and then there have been other syndicated opportunities but generally they've been pitched at the minimum 250,000 [dollars] or 500,000 level," Bailey said.

"We really are trying to give ordinary New Zealanders an opportunity here to be part of this."

However, it was not a short-term investment.

"We're promoting it at this point as an illiquid investment, meaning if you're going to put your capital in assume that it's going to be there for quite some time but we will try and bring liquidity along the way," he said. "If you're investing in a farm this isn't a six-month sort of play ... think in years."

Bailey will act as an independent director at PDI and not an investor.

Once the funds have been invested the plan was for PDI to trade on the internet-based trading platform unlisted.co.nz - which could take about 18 months - and then shareholders could decide each year whether to pursue a listing on the NZX.

"There's a bit of a vein of thinking out in the New Zealand community that we'd like New Zealanders to be owning farms, so here's an opportunity," Bailey said.

Risks for investors included currency, volatility in prices, legislation, weather, pest and diseases.

Volatility was a key word for everyone to keep in mind, Bailey said.

"We do expect prices for dairy products to be volatile going forward and there's currency volatility sitting in that, that's another key driver, but in saying that we think that dairy farming in New Zealand is the best placed anywhere to cope with the volatility.

"And even though there [will] be quite marked saw-tooth volatility ... the trend line we think is positive going forward when you look at the big picture in the world of supply and demand for food."

MyFarm Asset Management, which will also co-invest in the farms with PDI, will earn fees for administering PDI and for setting up and operating the farms - usually by employing a contract milker who could also be a co-investor.

The operational fees at current costs and prices using a contract milker were intended to be similar to those for an absentee farm owner that engaged an about 20 per cent sharemilker.

The initial public offering is open until April 20.

- NZ Herald

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