Dairy farms with moderate debt are generating good cash flow right now, strengthened by last week's $6.10 payout announcement from Fonterra, according to MyFarm director Andrew Watters
' "In fact 2009/10 has been a profitable year on South Island-based MyFarm syndicates.
"For example, the average MyFarm Southland dairy farm is generating a
margin of $2.70/kg MS prior to debt servicing which is a return of more than 7 per cent on total assets," he says.
MyFarm is a private rural asset management company with 31 farm investment syndicates in New Zealand and Australia, which it manages on behalf of investors. Most of these are partnerships between the on-farm equity manager and the off-farm investors.
Since 2000, earnings on the average South lsland dairy farm before interest and tax had been a relatively consistent 44 per cent of the payout, with the profit margin ranging from 30 per cent to 55 per cent of total income, Mr Watters says.
"Take away the issue of debt funding and Canterbury and Southland dairy farms have been consistently profitable over the past 10 years."
He says increases in average prices at Fonterra's global DairyTrade over the past six weeks are another good signal for healthy farm cash flows.
He predicts this will mean many of the dairy farms caught with high levels of debt will be able to work their way through this season "in an orderly fashion and there won't be a flood of farms into the market, as some commentators suggest".
"Investment interest in quality, low or no debt investment propositions is strong because of this unique situation where farm cash flows are very healthy, and yet farm values are subdued because of a lack of capital and tightening credit criteria."
