Australian Dairy Farms – Opportunities to be milked?

Sydney, 26 February 2014- The Australian dairy sector has been in the headlines recently as the takeover battle for dairy processor Warrnambool Cheese & Butler (WCB) played out. 

Eventually won by Canada’s Saputo, the level of competition and premium price paid for WCB is an early indicator as to the strategic positioning underway in the dairy sector on the back of higher global demand and prices for dairy products. 

CBRE’s Director of Agribusiness, Robin Gardiner, expects to see increased corporate or large scale investment in Australian dairy farms over the next couple of years.

“Whilst corporate investment in Australian dairy farms has been occurring over the past 10 years, only 3% of our dairy farms are actually owned by corporates,’ said Mr Gardiner.

Mr Gardiner believes there are many factors at play in driving the increased levels of investment.

“There has been a sharp increase in investing in Agribusiness assets across the board in recent years. Dairy farms are particularly appealing to shareholders and investors as they have a regular cash flow and the ability to lock in milk prices, as opposed to many other agri-commodities having more erratic cash flows.”

Addition drivers of investment include:

·         Opportunity for processors to vertically integrate to secure milk supply - increases competitive tension in the property market for strategic larger scale assets;

·         Availability of management systems and professional managers to optimise and monitor production and ensure quality control – strong appeal to corporate and offshore investors;

·         Ability to increase dairy efficiencies/production in a relatively short timeframe through investment in technical and agronomic improvements – requires new capital and expertise;

·         Australia’s reputation as a supplier of consistently high quality dairy products - reduces investment risk, with potential for price premiums for niche products;

·         Opportunities to quickly upscale production through dairy acquisition or greenfield  and brownfield development;

·         The prospect of new free trade agreements benefiting the Australian dairy sector.

“Given the ongoing success of the dairy sector in New Zealand (they supply about 32% of manufactured milk product to the world market), and the strengthening of the $NZ against the $AUD, we are likely to once again see more investment from New Zealand investors in Australian dairy farms, competing against Asian and European investors.”

The recent Australian – South Korean Fair Trade Agreement is a positive influence on the dairy property market, with the elimination of tariffs (up to 36%) on Australian cheese entering South Korea. Pending Free Trade Agreements are also expected soon between Australia and China and Japan.

Additional immediate influences on the dairy property market include:

·         Increasing farm gate prices and processor competition - a stark contrast to the negative impact the Coles/Woolworths $1/litre campaign had on the market.

·         A sharp increase in live dairy cattle exports which are up 34% to 87,300 head for the year to 30 June 2013 –another revenue stream underwriting returns.

·         Greater certainty around water policy for irrigation based businesses.

·         Relatively low interest rates.

·         Deteriorating seasonal conditions in most production areas.

·         A range of vendors who are financially distressed or post retirement age.

In Australia the rationalisation of the dairy production sector has been ongoing over the past 30 years with some 15,600 dairies ceasing to exist since 1980. Numbers are now down to 6,400. The average milking herd has increased dramatically from about 90 (in 1982) to 260 head per dairy today. The national dairy herd is currently at about 1.65million head, well below the peak of 2.17million head in 2001.  CBRE Agribusiness expects this rationalisation and up-scaling to continue, driven by improved efficiency objectives and the deployment of new capital.

Given the relatively positive global dairy market sector settings at present, with reports of Asian demand growing by at least 5% annually, and despite the deteriorating seasonal conditions in many of the main dairying areas in Australia at present, CBRE believe it is an opportune time to invest in Australian dairies, whilst the dairy property market is near the bottom of the cycle.  The current seasonal challenges favour buyers as vendor anxiety increases.

A recent specific example of how values have changed in recent years is the pending sale of a modern 60 unit rotary dairy with irrigated pastures located in south west Victoria.  The negotiated sale price in late 2013 was nearly 50% below the sale price achieved in 2008, just after the peak in the market.  CBRE do not expect this level of discounting to continue in the medium term.

Victoria dominates the dairy market with about 67% of all the dairies in Australia being located in the state.

CBRE Agribusiness research of a large section of the Victorian dairy property market (refer to the table below) confirms that overall the volume of dairy farm transactions has been in decline since the peak of 2006/07 at about the time when dairy property values also peaked.

CBRE Agribusiness Research

“The dairy property market appears to have reached the bottom of the cycle and offers potentially attractive returns.  In some cases dairy farms can be purchased at up to 50% of their current replacement cost – it is an opportunistic time to invest,” Mr Gardiner concluded.

CBRE Agribusiness are aware of in excess of $135million (excludes cattle herd value) worth of dairy farms with a combined production output of circa 120 million litres, currently available for sale.   Given that dairy property values generally lag significant movements in milk prices, there are currently some attractive investments opportunities in the dairy property market.  

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