Uruguay 'the new Southland' for PGG

The lure of cheaper land for beef and dairy farming is behind PGG Wrightson's plan to raise more than $100 million for farming in Uruguay.

One dairy sector observer described Uruguay as a bit like Southland some years ago, when cheaper land prices attracted North Island dairy farmers to set up there.

There were already some significant investments from New Zealand going into places like Chile and Uruguay.

"Frankly, we think it's going to be a wave," said the source, who has an understanding of what PGG Wrightson is considering.

On Tuesday, the listed rural services giant announced it was considering a public offering to farmers and other investors for a company based on applying New Zealand farming systems in the South American country.

The proceeds of any NZ Farming Systems Uruguay (NZFSU) offer would be used to buy and develop farms that would use farm management tools developed in New Zealand, PGG Wrightson said.

The company is expecting that, if it goes ahead, the offer will open in November.

No further details were available but it is understood about two thirds of any capital raised would be applied to dairy and a third to beef farming.

Using cheaper land would naturally help widen margins between production costs and commodity prices.

Although the offer is likely to be a general one, the probable concentration on dairy indicates it will be pitched heavily at dairy farmers.

The fact that Fonterra's forecast payout this year is unchanged at $4.05/kg of milk solids - with even that threatened by the dollar's strength - may make the offer tempting for some in the dairy sector. If the offer sucks capital away from Fonterra, that could make it harder for the co-op to keep boosting production.

Fonterra - through its investments such as Soprole in Chile - does provide shareholders with significant exposure to South American dairy processing.

But New Zealand farmers could find it difficult to individually take direct advantage of South American land prices, and any PGG Wrightson offer may allow them to collectively get a stronger slice of the action.

The source suggested the NZFSU deal could be viewed as "a very big farm partnership".

In May, PGG Wrightson director Craig Norgate told a farmers' meeting in Hawkes Bay that part of the firm's strategy was looking to invest in farming in South America, which was predicted to undergo growth in the next decade similar to that New Zealand had been through, The company had a demonstration farm in Uruguay "literally 10 times more productive" than its neighbours by using New Zealand seeds and farm management, he was reported as saying.

Late last year, PGG Wrightson spent about $15 million on mainly-dairy farms in Uruguay. Norgate said in May that PGG Wrightson was looking to include New Zealand farmers in its Uruguay operations.