Time to buy a dairy farm?

‘‘To buy or not to buy’’ – that’s the question on dairy farmers’ minds as they weigh up whether now is the right time to invest in some rural real estate.

Milk prices are up, land values are flat or falling, cow prices are trending down, interest rates are low and Fonterra shares are in decline – all ingredients for dipping a toe into ownership.

‘‘We looked at over 20 farms and we became pretty good at doing budgets quickly to figure out if a farm could work with the budget we had,’’ Mark and Cathy Nicholas say.

‘‘We put offers on a few farms which weren’t accepted, before finding the Tirau farm.’’

Even so, it would not be everyone’s choice of a career. For a start there is the early morning milking, the isolation, uncertain markets and the criticism from townies over water quality.

Not only that, but one of the main reasons for getting into farming has changed.

Traditionally, farmers have accepted the downsides of their job in the knowledge that when they retire there will be capital gain after they sell the farm.

No longer, says Dairynz economist Matt Newman.

‘‘If they’re hoping for the capital gains that previous generations achieved then they’re going to be disillusioned. Land values are the biggest asset and capital gains have pretty much dried up after the downturn.’’

The downturn started in the 2014-15 season, a year after the price Fonterra pays its farmers hit an all-time record high of $8.40 per kilogram of milksolids. The next two seasons saw it drop to $4.40, then $3.90.

It might be a watershed moment for the industry. Cow numbers reached a peak of

6.7 million in 2014 but by last year had declined to 6.4 million.

The Reserve Bank, as it does every year, warns about dairy debt. Altogether agriculture debt is $62 billion, with dairy at $41.5b. Four years ago dairy farmers owed the banks $34b.

But where banks were once eager to lend to farmers with few strings attached, they now cast a stricter eye over budgets.

Michael Woodward and his wife Susie, who have just made the shift from Canterbury to Otorohanga, agree banks are more cautious.

In fact the Woodwards would have bought their 170-hectare farm sooner if the bank had not advised against it. They have been sharemilking for 15 years.

‘‘Our manager said a year ago, ‘No, you hold off. You’ll make more cash if you stay in your sharemilking job.’ We had identified a property but . . . they made it clear the payback from that farm was going to be longer than on this farm, and would have required too much handson. Now we’ve got a buffer if the payout drops,’’ Woodward says.

Mark Nicholas says he and Cathy had been 50:50 sharemilking for 10 years, with the past six years milking 700 cows on a farm near Tokoroa before purchasing the 120ha farm where they now milk 280 cows.

‘‘In all our farm budgets we didn’t put in capital gain – we put nil. We worked on the fact land values could come backwards.’’

Newman says that for some new entrants, now may be as good a time to buy as any.

One measure of dairy values is the price of Fonterra shares, which farmers must buy if they want to supply the co-op.

A farmer with the average herd size of 431 cows, producing 158,000 kilograms of milksolids a year, pays $587,760 for Fonterra shares today, whereas at the beginning of 2018 the price would have been more than $1 million.

Fonterra pays its 10,500 farmers $6.75kg/ms, out of which they pay working expenses, interest, rent, and income. Not included are one-off capital items, such as a new dairy shed.

Newman says: ‘‘Dairynz’s current break-even milk price is $5.95, which leaves farmers with 80c per kg, of which 40c is depreciation, resulting in 40c per kg they could put into their back pocket . . . Based on average dairy farm production, this 40c per kg amounts to $64,000.’’

Prospects are uncertain for next season. Fonterra has forecast it will pay farmers a range of between $6.25 and $7.25 per kg/ms. In the past it has been criticised for picking a figure, and then having to change it.

The average break-even over the past 10 years is $5.75, which offers farmers a reasonable guide to future, Newman says.

Nicholas believes it’s vital for the industry that the familiar route into ownership via sharemilking be maintained. In the past two decades, sharemilker numbers have fallen from more than 5000 to below 4000.

‘‘In the past everyone was given an opportunity [to own a farm] but those are getting fewer and fewer.’’