Equity deals proffer solid returns

So-called "new generation" equity partnerships in dairying have performed solidly in recent years, despite agricultural partnerships having a somewhat chequered record previously, says a National Bank report.

The bank believes equity partnerships may become even more widespread due to the expense of modern dairy and sheep farms.

Equity partnerships may involve groups of farmers, "city investors" or a mix of the two, and can be a way to attain or expand exposure to farming, getting economies of scale and spreading risk.

The report looks at 14 equity partnerships established on dairy farms in 2000-01 with National Bank involvement.

They had increased the equity value of the business and milk production by "impressive" averages of 18 per cent and 8 per cent compound per year respectively. The ingoing equity averaged $1.9 million and was now estimated at $4.2 million. Most had equity growth between 10 per cent and 20 per cent but five exceeded that.

However, cash dividends had generally been low or non-existent and substantial additional investment had been needed to get the productivity increases. Capital expenditure had been financed by extra debt and ploughing in available cash. But very few partnerships had called on investors for more cash simply to sustain the business.

National Bank rural economist Kevin Wilson's "gut feel" was that other start-ups under different ownership models would have done just as well in the period. Management, rather than ownership, was the key to a farm's performance.

But Wilson said the success of the more recent equity partnerships contrasted with experience in the 1970s and 1980s when kiwifruit, and sheep and beef partnerships had come "unstuck" due to policy changes.

For example, reforms in the 1980s had pushed up interest rates and tax concessions were cut. Partners with expensive borrowings could have "very strong negative cashflow" if the business ran into trouble.

These sorts of problems had dried up equity partnerships in agriculture generally, Wilson said.

"It knocked nearly all of them out ... a very few survived."

But they had been revived in the late 1990s as dairy industry growth and restructuring gained impetus - there were now estimated to be 250.

This reflected the fact that "scale became the flavour of the month" in dairying, Wilson said.

Those who chose the equity partnership route to get scale had benefited from dairying's good performance since then.

Wilson said the partnerships studied involved "a mixture of farmers and city investors".

The bank noted that "future increases in the land values and productivity could well be more incremental than the leaps and bounds of the past five years - profitability of all businesses is being squeezed with increases in costs".

The 14 partnerships were all in the South Island. Ten were conversions and four started on existing dairy farms. All but one still operates as an equity partnership. However, the bank found to its "surprise" that most had changed either one or more shareholders or the proportions held by shareholders, or both.

"The differences between the more stable of the [partnerships] and the rest include good leadership by the chairman, good planning and implementation of day-to-day issues, and good information transfer between all parties. In other words, the no surprises philosophy."

The bank believed equity partnerships would continue to have a role in agriculture as long as they were well run. "The absolute dollars now involved in large-scale dairy [and sheep farming] may necessitate some form of equity partnership to find the capital necessary to change ownership in the future."


Sharing milking

* Dairying equity partnerships have been performing well since being established in 2000-01.

* The partnerships studied increased equity value and milk production by averages of 18 per cent and 8 per cent compound per year respectively.

* The National Bank predicts such partnerships may become more widespread due to the expense of modern dairy and sheep farms.