Winter is traditionally a time for dairy farmers to make sure their farms are in good order and can meet the demands that will be put upon them in spring.
This year, they'll need to look not just at their assets but also their whole business, and this is more urgent and challenging than it has been for many years.
The world has changed. The global supply of dairy products -- much of it from competitors who have upped their game -- is growing faster than demand.
It seems likely that low prices will be around for some time, and producers that succeed in this environment will be those with the lowest cost of production.
This is not just about cost-cutting, although this has its place. It's a race where the winners will be those with the most efficient businesses.
On the farm, this means clear direction and disciplined management, building on New Zealand's strengths in pasture management, and taking full advantage of advances in genetics, forages and labour-saving technologies.
This may require cash. At a time when many farms are already running operating losses and reducing high marginal cost production, farmers face the prospect of debt-servicing and costs being spread over less production.
In New Zealand farmers are far from markets and sell down the value chain. As a result they are more exposed to market volatility, and often rely on banks to fund them through cyclical lows, confident in speedy recovery.
A more volatile environment requires better risk management. While the best strategy is a low cost structure and an ability to respond to varying market conditions, derivatives can increase the predictability of product prices, and moving debt from the predominant floating rates to fixed reduces that variable.
Another alternative is seeking new equity investment.
Investing in dairy farming at the bottom of the price cycle has its own challenges and opportunities. Foremost, it requires investors to look past the headlines to a sector with great long-term prospects and -- in some cases -- adequate short and medium-term returns too.
It's generally accepted that investments in dairy business return about 3 to 7 per cent but top-performing operations have achieved returns in the high single figures and even low double figures.
To generate a similar return in the current environment, investors are considering three key issues:
• The expectation of an increase in dairy pay-out over time
• The ability of a farm to adapt to a lower cost structure and still perform
• An opportunity to buy quality land in good locations and with quality improvements in this more constrained environment.
Attracting investment is seldom a means of restructuring balance sheets. In fact, highly indebted farmers often question why they would consider taking in new equity when their own equity has been eroded by losses, asset values are down and interest rates are low.
Others see selling assets and leasing them back as a low-risk way to strengthen the balance sheet while still retaining control of the business.
Currently, investors are looking at the implications of a milk price of about $3.90, and $4.50-$4.75 in 2016-17 with no certainty about when prices may improve in an environment where many farms need a milk price over $5 to just break even. But the capital is out there, and investors are aware demand for dairy products from the growing middle-classes of Asia will underpin the profitability of dairy for decades to come.
For investors, venturing off the beaten path and buying in at the low point of the price cycle has its advantages. The entry price can be lower, they will buy better, and income statements will show which businesses are worth investing in at current income levels.
Investment in dairy is nothing new, but until recently investors were often invited to "participate" in dairy, to "share the commodity story" with the promise of attractive returns from growing primary commodity demand and consequent capital growth.
Today, the expectations of investors to our top-performing farms should be no different to the top performing companies on the NZX -- companies operating in mature markets attract investment by demonstrating an ability to outperform their competitors.
To see the leading edge, the annual Dairy Business of the Year competition -- of which ANZ is a supporter -- features farmers who combine all the attributes of high performance, which is on-farm management, pasture productivity and new technology to drive down the cost of production.
In the 2014-15 season, the top businesses achieved $3.13/KgMs cost of production, including depreciation and owner's labour.
Many farmers are reducing costs, often faster than predicted. ANZ customer forecasts indicate 10 per cent of farmers have a plan to operate at this cost level.
As more join them, this will restore New Zealand dairy's ability to compete on cost and provide an opportunity for investor returns around the desired level, provided investors can be confident management is in place to perform at this level.
The expectations of investors to our top-performing farms should be no different to the top performing companies on the NZX -- companies operating in mature markets attract investment by demonstrating an ability to outperform their competitors.
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For farmers, counter-cyclical investment in dairy not only brings in working capital at a time when they need it most, but it also helps stabilise the sector as a whole by running counter to the peaks and troughs.
Equity partnerships, in which investment funds -- sometimes pooled, sometimes from single entities or investors are brought into the business -- have proven to be among the most resilient when prices are low or the business faces other adverse conditions.
The change from "participation" to "performance" in agri-investment is a fundamental shift towards making more agri-businesses attractive and accessible to capital.
At ANZ a major focus for our agri-business team is creating "investable businesses." That means helping owners address and improve areas such as productivity, governance and management of these businesses.
Through our networks and sponsorships such as Dairy Business of the Year, we have identified top performing dairy businesses and -- through our partnership with Ministry for Primary Industries and our own research -- have showcased them and their strategies for success to the industry.
The overall goal is to enhance returns through consistent improvements in productivity driven by research, innovation and good management.