Words by: Anne Lee
Kiwis are known for their adventurous spirit and love of seeing the world.
Kiwi dairy farmers are no exception – indeed many of our well known pioneering dairying families
trekked here from the opposite side of the globe to become cornerstones of the industry.
So it’s no surprise there have been those who have looked offshore, with the aim of replicating our successful grassbased systems.
Attracted by the comparatively lower land prices, the United States, Chile, Brazil, Uruguay, Argentina, Australia and even Eastern Europe have been among the countries where farmers have invested, albeit with varying degrees of success.
Canterbury Grasslands and Manuka are two companies that ventured to the other side of the Pacific almost 15 years ago now and are thriving.
Mark Townshend is chairman of Grasslands, and the original promoter and still a Director of Manuka and an investor in both and says offshore investment to diversify your farming portfolio can still be a very attractive option but, as with all investments, it can be a matter of timing.
“When the milk price is high and everyone wants to get into dairying, that’s probably the time New Zealand dairy farmers with good liquidity thinking of investing offshore should take a look.
“When the mood’s a bit morose in NZ, as it is now, that’s when there are more likely to be opportunities right here.”
The most compelling reason for farmers to diversify and invest offshore has been to take advantage of lower land prices.
“That allows you to go there at scale and that’s important because there are greater overhead costs running a business offshore. You’re flying people around and you tend to have to do things that are done here by organisations such as DairyNZ or Fonterra or LIC.”
Mark estimates 10-20% of the early economic advantage of going into an offshore business at a lower land prices gets eaten up by the initial costs of running the farming business in an area that’s not as well set up as NZ in terms of support and servicing.
Canterbury Grasslands chief executive Zach Ward agrees and shares Mark’s view that it’s not really that different to the hurdles faced by those who first moved to Canterbury and Southland from the North Island.
“Some of that infrastructure, some of those services just aren’t there to begin with,” Zach says.
Zach oversees both Grasslands’ New Zealand and the US-based dairy farming businesses which includes 14 dairy farms in Missouri but has also worked in South America. He says over time services do develop and the costs of running the farms on a day-to-day basis becomes a lot more similar to running them here.
Before investing Mark warns stringent due diligence must be carried out up front.
The risk is that most of that focuses on the farming aspect – how much grass you can grow, the climate, soils.
“When we started looking in Chile in 2004, 10% of our due diligence was around the farming aspect – we were experienced farmers so that part of it was easy. Where we had to put 90% of the effort was into the non-farming aspects – tax, the ability to free-flow capital in and out, business structures, safety of your people, that sort of thing,” Mark says.
That’s where Zach says a huge amount of value can be gained or lost and investing in good professional advice both in NZ and in the country where the investment is being made is imperative.
Manuka has been well rewarded for its pre-investment research. A decade later no real country specific surprises have emerged.
“As farmers we want to rush in and build a farm and starting milking the cows, that’s what we know but having the right advice, the right type of loans, the right company structures, the right tax advice sets thing up to run smoothly and saves a lot of money in the long run,” Zach says.
The US for instance has capital gains taxes which have different trigger levels but Zach says that’s an example of where good advice is necessary as it’s also tied in with other taxes.
In Chile there’s also a capital gains tax but its level of tax rate is under review by the current administration.
Having a good understanding of government policies and keeping a watchful eye on the political situation is a must.
“Currency can be an exposure too but it can go both ways,” Mark says.
In the US they’ve learnt that a hybrid farming system works best in the continental climate.
“You can take the principals of the lowcost, grass-based system with you but you have to be prepared to adapt whether that’s to the climate or labour conditions – if you go there with a view to create a mini New Zealand you’ll create yourself a world of hurt,” Zach says.
They’ve looked to Europe for ryegrass varieties, for instance, better adapted to the extremes of climate.
Likewise getting the right type of cow and developing herds takes longer offshore. In the US they’ve used NZ semen but use their own rankings for sires based more heavily on fertility and milk volume as they’re not penalised for that in the milk cheque.
Putting power cables underground, knowing how much feed inventory to have on hand – they’re all lessons they learned along the way.
“There will be head winds at some point and you have to be prepared for that – part of it is having the cash flow and capital structure to handle it and part of it is having the right people,” Zach says.
In Chile the farming system is closer to that of NZ but it took a concerted effort to get staff there to believe in it.
“So the people aspect of it and getting buy-in locally can’t be underestimated,” Mark says.
An appreciation for cultural differences is important and language doesn’t have to be a major barrier.
Both Mark and Zach say that while the chance to experience another culture and travel isn’t a reason in itself to invest offshore it’s definitely been a positive.
For most Kiwi-led offshore dairying ventures it’s taken close to a decade to see operating returns hit targets.
Mark says it’s taken longer than they initially thought to get the businesses returning well but they have achieved that now. The capital gains, though, did come faster.
In Chile, for instance, they’ve been able to triple the value of the land they bought between 2005 and 2008.
“Land prices have gone up here too but the gains there have been much greater.
The operating return there is similar now but it took us longer to get there than we thought,” Mark says.
The US story is similar although the capital appreciation, though greater than expected, hasn’t been at the same rate.
Mark says compared with other ways of diversifying, such as investing in listed stocks, there’s less liquidity but for farmers, there is more confidence in understanding the farming business.
For many non-farming investments, you’re heavily reliant on others’ advice, he says.
Both companies have a large number of shareholding entities – close to 45 in Grasslands and 100 in Manuka– with a number of family members often involved in those entities.
They both have a high level of engagement from shareholders and will routinely have 90-95% of shareholder representation at their annual meetings.
Now after almost 15 years, shareholders have indicated that while about 90% expect to still be shareholders post-2030 several are now reaching the stage they want some cash out of the business so they’re working on how to achieve that.
Looking back over 15 years across the two operations, Mark says there have been a few surprises, a few tough days and a few headwinds.
But overwhelmingly the overseas investments have been hugely rewarding in terms of very good wealth creation, many good life experiences and changing the lives of many local people by offering them opportunities they would not have had without the presence of overseas investors. The obvious financial success of the operations would be somewhat hollow if the local people were not also beneficiaries of their farming projects, Mark says.
Some lessons
• Do your due diligence well upfront – 10% will be on farming, 90% on financials, legal structures, tax, geo-political
• Invest in good professional advice both onshore and in the country where the investment is located.
• Go at scale
• Bring people in the offshore country along with you when it comes to farming NZ-style – it’s a big change for them
• Invest in good people
• Be patient
