Where are the opportunities?
Most people have ambition for themselves, their career and ultimately for their family. People that make a difference generally want to engage in fulfilling work or endeavour within an industry that they love. Ambition means that they either want more important roles, increasing responsibility and the increasing [salary] rewards which go with this, or that they want to access a high growth opportunity so that they can rapidly build their wealth and participate in the rewards of asset ownership.
Agriculture has been a fantastic field of opportunity for the young. Within my lifetime (having just ticked past 51), young men and women in the 1980s and 1990s could shear sheep or share milk their way to farm ownership. Roles were relatively plentiful, the currency of cows to buy a hectare of land was favourable (for sharemilkers) and average farm size was relatively small – all meaning that there was a well-trodden pathway of career advancement. And when you got there, land values appreciated strongly; it was a matter of getting on the land ownership escalator and hanging on.
Many young people say that land ownership is harder than it has ever been. Older people may retort, ‘it was always hard’. But what does the data say about all of this?
From New Zealand Dairy Statistics and Dairy NZ Economics Survey data, we can see that between 1994 and 2014;
The number of 50/50 sharemilking jobs on offer fell by 44%
Sharemilking jobs used to be bigger than the average farm size (+19%) but are now smaller (-6%)
The sharemilkers exchange rate; the number of cows required to buy a ha of land had increased by 31% (it took 17.5 in 2014, versus 12 in 1994).
Getting to farm ownership was a clear goal; the data in figure 1 shows that the decades from the 1970’s through to the 2000’s (Canterbury bareland data - I haven’t come across another data-set that goes back to the 1950’s) land ownership delivered on average a greater than 10% p.a. return (simple return not compound). The game was to use leverage to maximise the land area that could be purchased. Assuming operating profits covered interest costs, one could achieve returns on investment of 15 – 25% depending on the level of leverage.
Figure 1: NZ Farmland value changes; average p.a. return per decade
Of course, there were times when the tide went out; the late 1980’s when interest rates spiked, following the Global Financial Crises in 2008 and with the two years of dairy downturn from 2014 to 2016.
The orange column in Figure 1 uses REINZ national dairyland data; for the decade to date land ownership hasn’t been as rewarding with a 3.4% p.a. gain on land ownership. This would imply an annual return on investment of more like 6 – 9%, again depending on the level of leverage employed and operating performance.
NZ dairy is still strong and opportunities will still be available in various forms for young farmers, but the path way will be less well-trodden.
So, what are the other opportunities for people who are bright, hardworking and ambitious? My contention is that there are great opportunities and that the rural service sector is another place to look. If a person can build their analytical skills, sales skills (nearly every job involves some level of selling in this sector) and inter-personal skills, and then match that with being willing to step out of their comfort zone then a new world of opportunity will open up.
Farmers and growers have tasks that they need to perform and complete, problems they are trying to solve and needs that they need to satisfy. Being in business is about fulfilling these needs through providing valuable products and services - at a profit.
Many of these needs are provided by large corporates or co-ops, but within each industry there are interesting niche or growth opportunities. Typically, these businesses trade at the value of their inventory plus 3 to 5 times their annual profitability. Typically also these businesses are in aging ownership; they may well be looking for succession in both general management and ownership.
In 2017 MyFarm is focused on our vision of creating opportunities and insights for investors in rural assets supported by leading thinking and excellent management. It is highly likely that we will be looking for people with ambition to join our team. It may involve a step out of the comfort zone but we promise an exciting ride. If you, or someone you know, is a person that might fit the bill, please keep following this post.
Data used in this article