NZ dairy farm investments generally offer the potential of superior returns but also carry inherent risks. Investors should seek independent investment and taxation advice before they invest.
In particular, investors must be aware that farming is a longer term investment and their investment may be relatively illiquid. Most investors contemplating an investment in a dairy farm would be prudent to have access to other, more liquid investment capital for any financial emergencies or more immediate needs.
The following principal risk factors may affect the recovery in full of invested capital or the receipt of the investment returns. These risks should be carefully considered before investing in a dairy farm.
Farm assets will be subject to New Zealand and global economic forces, which may be completely beyond the influence, control or prediction of farmers. These could include currency fluctuations, changing consumer demand and preferences, wars, global pandemics, foot and mouth or other diseases, monetary policies, fiscal policies, global trade rules and agreements, trade “wars”, and government policies. These factors may increase or decrease the intrinsic value of a dairy farm.
New Zealand is a small economy that can be particularly vulnerable to economic dislocations, such as rapidly rising oil prices, extreme current account deficits, very low savings rates and a disproportionately large government sector.
Most of New Zealand’s dairy output is sold into the world market and traded mainly in US dollars. Consequently, the price achieved in New Zealand dollars is affected by movements in US and other trading partner exchange rates. At times when the New Zealand dollar is strong, returns from exported agricultural products will be reduced.
The exchange rate is affected by many factors—all of which are beyond the farmer control and are very difficult to predict reliably.
Changes in legislation and Government policy, taxation, environmental policy and accounting rules may impact upon the intrinsic value of farm assets, and the operations and performance of a farm investment.
Weather and Climate Change
Farms may not reach production targets in every season due to unpredictable weather conditions. A prolonged wet season or extended summer drought can have a significant effect on production and returns in any one season.
NZ dairy farmers aim to mitigate this risk by using modern technology options, rather than relying solely on favourable weather to increase production. Technology options include new superior pasture plants and forages, irrigation and management systems to increase productivity.
The effect of adverse weather in any specific area will be reduced by having a geographically diversified farm portfolio.
Pest and Disease Risk
Pasture and animal health may be affected by pests and diseases and these may impact on farm performance. To mitigate this risk, dairy farmers have systems and processes to monitor and maintain animal and pasture health under normal farming conditions. These systems and processes will not mitigate biosecurity risks, for example an outbreak of foot and mouth, and these could have a devastating effect on farm performance at an industry level.
Dairy and Other Agricultural Commodity Price Volatility
International dairy prices are subject to fluctuation in response to normal supply and demand cycles. Whilst exchange rates and commodity prices tend to move in the opposite direction, it is possible that a combination of high exchange rates and falling commodity prices could result in lower returns for a period.
Increasing Environmental Regulation
The impact of farming upon the environment is now subject to increasing scrutiny. Central Government or regional councils could impose further restrictions upon land use and farming practices. Any liability of a farm that results from non-compliance, or other claims relating to environmental matters, could have a material adverse effect on that farm’s performance.
There has been a general global trend over the past two decades to reduce protectionism and trade barriers. However, it is possible that this trend may reverse. Higher trade barriers would make exporting our dairy products more difficult and reduce the returns that are received.
MyFarm believes that the rising global demand for food is likely to mitigate this risk. Over time governments face powerful incentives to make sure their citizens have food, which can help create pressure to lower food tariffs and other trade barriers.
Emissions Trading Scheme
The Government has indicated that the Emissions Trading Scheme will be implemented for agriculture in 2015 through costs levied on the major agricultural processors, such as Fonterra. These costs will then be deducted from suppliers (farmers). When the scheme is implemented farmers through their processors will be required to fund 10 per cent of their emissions, increasing by 1.5% per year. DairyNZ estimates that the initial cost for an average farmer will be approximately $2500 p.a. Under the formula the cost in year two would be $2875 and so on. Whilst this represents a relatively small cost as a proportion of a dairy farmer’s expenditure, it is never-the-less an additional cost not faced by other competitor dairy farms globally.
Human Health and Nutrition
In the past some studies have suggested a link between consumption of various food (including dairy products) with human health issues. Potentially such studies could impact on demand for dairy products. As evidenced by Fonterra’s recent botulism contamination scare, there is also a risk that market prices and access could be adversely affected by poor product quality.
Frequently asked questions
In-depth answers to the questions most asked by investors
Ways to invest
Investing in New Zealand farming doesn't mean buying the whole farm. MyFarm gives you options.
New Zealand Investment Law
The New Zealand Government has legislation in place to ensure this country is a safe place to do business.
Risk is an important aspect of the farming business. The uncertainties of weather, yields, prices, government policies, global markets, and other factors can cause wide swings in farm income. Risk management involves choosing among alternatives that reduce the financial effects of such uncertainties.
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