Canterbury Dairy Market Overview and Outlook October 2018
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The Canterbury dairy market ended the 2017/18 season having seen a total of 15 dairy farms sell for $125 million. This compares to the $126.9 million for the 16 farms sold to New Zealand purchasers in the 2016/17 season.
Market sentiment appears subdued, due to the limited liquidity, the threat of Mycoplasma Bovis, the removal of international purchasers, the risk of further environmental regulations and the performance of Fonterra.
It is anticipated that due to the smaller pool of buyers the value gap between higher quality and poorer quality properties is likely to widen further. In many cases we understand that there is some pressure from financiers for these properties to be sold and debt repaid after the recent dairy downturn.
Since the September 2017 General Election, and the November 2017 Ministerial Directive letter we are not aware of any new dairy farm sales having gained Overseas Investment Office approval. As a result, there was no foreign investment in the 2017/18 season, in direct contrast to the 2013/14 season, where there was $171 million of direct foreign investment in Canterbury dairy farms. We consider that the effect of reduced international capital will be hardest felt by larger scale properties above $10 million and beyond the reach of the buying power of most New Zealand based market participants. Vendors of these larger scale properties may need to consider subdivision or reducing their asking pricing expectations.
The total transaction value with New Zealand domiciled purchasers has been relatively steady since the 2014/15 season within a range of $150 to $125 million per annum.
Following the milksolid price shocl of 2014/15 and 2015/16, both the Reserve Bank of New Zealand and the Australian Prudential Regulation Authority realised that dairy farm debt placed the economy and the banks at risk and therefore sought to tighten some lending policies and strengthen farm balance sheets against the future risk of milksolids price slumps.
The continued low interest rates have been a positive influence on the market. However, we are aware that most banks now require both interest and principal to be repaid, and that introduces a higher threshold of profitability required in order for a potential purchase to be approved by the bank.
The Canterbury Land and Water Regional Plan has the potential to limit production on most farms. Properties with very high levels of production tend to have a significant portion of imported supplementary feed. As dairy farmers are assessed against the Environment Canterbury Good Management Practice benchmark, we anticipate that the dairy farm market will mature and place greater emphasis on the true drivers on sustainable long-term production: soil type, secure low-cost irrigation water, quality of irrigation and farm infrastructure.
Also to note is that The Waimakariri subregional plan has been delayed and is due for publication shortly. There is the risk that this plan may include nutrient reductions beyond market expectations and negatively impact on values.
At the market peak, competition led to an under-pricing of irrigation cost and reliability. We are seeing potential purchasers taking now a more discerning view.
All other things remaining equal, we would anticipate that dairy farm land receiving water from those irrigation schemes providing the lowest cost water at the best reliability would be more sought after in the market compared to farms receiving higher cost water or at a lower level of reliability.
We are starting to see a preference for farms receiving water from an irrigation scheme who holds the nutrient discharge consent compared to a farm sourcing irrigation water from ground or surface takes with an individual consent, together with the requirement for a separate consent to farm.
Dairy farms situated in higher cost irrigation schemes or those with short dated ground or surface water consents may also struggle to sell in the current market where the reduced number of buyers have a greater choice of options.
The final payout for the 2017/18 season was confirmed at $6.69 on 13 September 2018. Although the price remained firm, the dividend of 10 cents/kgMS per was below expectations. The key theme for the year was that of balance sheet recovery after the second successive season with a farmgate payout above the historical average of $6 kgMS.
The outlook for the 2018/19 season is for continued strong payouts above the historical average. Fonterra are forecasting a farmgate milkprice of $6.25-$6.50 kgMS, Synlait, $7.00 kgMS, Westland $6.50 to $6.90 kgMS and Oceania $6.90 kgMS.
Our analysis illustrates that for our representative Canterbury dairy farm the yield was at its lowest point throughout 2014/15. This is a function of reduced expectations of the future dairy payout and the high market prices for dairy farms. As the farmgate milksolids price improved and dairy farm values softened our implied yield has also increased as expected. We anticipate that this trend will continue into the foreseeable future. Yields will continue to increase as purchasers require a greater return on capital to reflect the increased risk of farming. This will lead to softening prices.
June to September quarter is a busy time on dairy farms and often listings are pulled from the market until mid-spring. As a result, we have seen little new sales evidence and early signs of the direction the market will take into the 2018/19 season.
The fear of missing out in the face of rising asset prices has subsided. It is likely the purchasers will hold off until those vendors needing to sell are compelled to accept a lower price.
Mycoplasma bovis is impacting on farmer sentiment, the results of early season bulk milk testing will provide an early gauge on the extent of the disease incursion and the likely success of eradication.
For these reasons we anticipate that Canterbury dairy farm prices will soften throughout the 2018/19 season.
For more information please contact the author of the update:
Colliers International | Rural & Agribusiness Valuation and Advisory
+64 21 991 348 | Greg.Petersen@colliers.com