The long and varied West Coast is one of the lowest entry cost regions for dairy farm ownership. Anne Hardie takes a look.
The West Coast has long been considered the second cousin in the dairy industry; a region renowned for its rainfall and hard slog rather than production and profitability. Yet with some of the cheapest land in the country, lower production costs and financial figures on many farms that sees them foot it with their higher-profile counterparts, it’s an often-overlooked investment opportunity.
DairyNZ’s head of South Island, Tony Finch, describes it as one of the last bastions for farm ownership in the country because there’s not many regions where you can buy a productive farm for less than $20,000/ha.
Even with reduced revenue from a milk company that has struggled to provide farmers with a competitive payout for the past five years, there’s still plenty of examples of businesses on par, if not exceeding returns, with anywhere around the country.
He points to last year’s Dairy Business of the Year awards where two of the 14 finalists were West Coast farm businesses after every aspect of their business was closely analysed and compared.
Figures such as Pan Farm Ltd which milked 560 cows in the 2016-17 season to produce 1247kg milksolids (MS) per hectare and achieved an operating profit of 30.2% and a return on capital (ROC) of 6.5%.
Though the ROC might not sound a great return on the money invested in a business, that’s a good figure for the dairy industry. The other West Coast farm, Clear Creek Dairy Ltd milked 600 cows that season for 850kg MS/ha and achieved an operating profit of 30.4% and ROC of 4.9%.
All achieved in a year when they were grappling with Westland Milk Products’ lower payout of $5.18/kg MS – before retained earnings compared with Fonterra’s $6.52/kg MS.
There’s no getting round the fact it’s a challenging region to milk cows, though. Rainfall exceeds six metres a year in its southern region and it’s a long way to haul feed across from Canterbury for those who want to add more inputs into their systems.
Geographically, it’s a massive region, stretching from Karamea in the north to the glaciers and beyond in the south – the same distance as Auckland to Wellington, to get it in perspective – and the sheer scale of it is reflected in the variation of climate and soil. From about 1.6m rainfall in the north to 6.6m in the south and sand near the coast to fertile valley floors and areas of water-logged pakihi. It’s the only region in the country where diggers have come in and flipped entire paddocks to break through the impervious hard pan of pakihi and bring free-draining gravels to the surface.
“It has that perception of rain and hard work and –let’s not gloss over it – it is hard work,” Finch says. “But that is what the farming industry has been built on. It has never been handed to people. Opportunities do exist.”
He says its image wasn’t helped by the huge interest in it a decade ago when cheap land attracted equity partnerships that managed the farms with absentee owners. That’s always hard, he says, and production suffered and some of those farms went downhill and were ultimately put on the market.
“It’s a hard pill to swallow when you buy something for $20,000 a hectare and have to sell for $15,000 a hectare.”
Shari Ferguson from Bayleys says back at the industry’s peak, before payout dropped, the best dairy farms for sale on the Coast were fetching about $30,000/ha including shares, while good farms were in the high $20,000/ha.
Now it’s a bit of an unknown because though there’s been plenty of farms on the market – some for a few years – and sales are limited. In the year to December 2018, the Real Estate Institute of New Zealand recorded eight sales, with half of those sold for less than $2 million, though the figures don’t reveal the size of the farms or the state of them either.
Ferguson says poor payouts and an ageing population have both contributed to a lack of investment in infrastructure on many farms. An older couple running a dairy farm by themselves are time poor and often don’t have the incentive to update infrastructure, while other farmers with high debt loading simply haven’t had the money to spend.
Fergal O’Gara from the West Coast accountancy firm Marshall Heaphy says a couple of poor payout years and a drought copped those farmers who did spend money developing their farms when they were expecting higher returns. Banks have told many they won’t handle another downturn and should sell, he says, while potential buyers wait to see where Westland Milk Products’ future lies.
While the company’s performance has no doubt put farmers under pressure, he says Westland is not a million miles behind the other companies and it’s been labelled for a couple of bad years.
“You can look at land prices in places like Matamata and Canterbury and would have to say it’s a better return on capital here and their operating profit per hectare is comparable. They’ve proven they can foot it with the other regions.”
Damien and Emma Groot from Clear Creek Farms are a prime example.
The former Rotorua sharemilkers went into an equity partnership with Damien’s parents a decade ago to buy a 306ha West Coast farm because the region provided the best bang for their buck. In their first year the payout fell from $8.29/kg MS to $4.50/kg MS, yet their business has continued to grow and last year they were finalists in the Dairy Business of the Year. Today they have a 24% investment in the business, plus 24% in a support block and separately they have bought a house at Lake Brunner which is rented out as holiday accommodation and adds to their growing investments.
Their farm at Taramakau Settlement, inland from Kumara, has a rainfall that varies from 2.5m to 4.3m a year – and even when it’s a 4.3m year they can still get a drought. It’s unpredictable and they farm for that by milking fewer cows, focusing on producing a more efficient cow and lower costs. Initially they milked 700 cows on 285 effective hectares and now milk 600 cows on 290ha.
Milking 700 cows produced 339kg MS/cow and a total of 236,000kg MS whereas 600 cows produces between 400 and 410kg MS/cow to achieve between 240,000 and 252,000kg MS. At the same time farm working expenses (FWE) have dropped from $4/kg MS to about $3/kg MS. In line with that, operating expenses have dropped from close to $4000/ha to $3193/ha with the latter including $300-$400 that is allocated to farm improvement.
Their focus is on producing a sustainable business that copes with the vagaries of the seasons and can survive those low-payout years.
Tony Wright is Westland Milk Products’ general manager for shareholder services; a company making big changes to enhance returns to shareholders. Regardless of what its structure ends up looking like, Westland Milk is heading away from commodity products toward higher-value, less-volatile products and Wright says the West Coast story will play a big part in achieving that.
“Most of the West Coast is still in forest and farming takes up only a small percentage of the land area and with low stocking rates the farming impact is much lower than other areas, so you can build your story on that.”
Its 10 Star Premium Standard (10SPS) milk is aimed at capturing that story of grass-fed milk produced in a sustainable way – all part of the company’s five-year business plan.
“We want to have a competitive payout and putting more product into those higher-margin differentiated products is the way to do that,” he says.
“It takes time and money to change to value-added products and if you get into those higher-margin products there’s higher specs and higher standards. Like the 10SPS which will be independently verified to make sure those farms are being farmed that way. Because you have this verification, you are in a much better position to get a premium.
“We are too small to compete with, for example, the economies of scale of Fonterra’s huge powder plants producing whole milk powder, so we want to get away from commodity products.”
The characteristics that make the West Coast challenging for dairy farming also provide those market opportunities such as 10SPS.
“One of the benefits of the high rainfall is that our rivers, streams and lakes on the Coast are 99% swimmable – nowhere else in the country has that quality. In a way it’s the ultimate sustainability story. Because of the climate, you have a lower stocking rate than anywhere in the country and less cows per hectare gives you a big advantage in terms of stock pressure on the land. A much smaller footprint.”
He describes one case study of water quality where the tested water leaving a dairy farm was better than when it entered the property from bush-covered hills.
“There’s so much subsurface water in some areas that when farmers put in drainage systems, they pick up some of that water. So there’s more water and when it leaves the property it’s better quality than the water coming on to the property.”
Parts of the West Coast are definitely challenging to farm, he concedes. But those farming successfully on the Coast will farm successfully anywhere, he says. One of the challenges outlined by DairyNZ consulting officer Angela Leslie is the huge variation in climate, soils and hence farming systems on the Coast. She’s a dairy farmer as well, farming with her partner, Bede O’Connor, at the western entrance to the Buller Gorge near Westport. She says there’s money to be made on the Coast by those with enough grit to adapt to any situation, because you never know what the season will fling at you and it might be completely different to what your neighbour is experiencing down the road.
“In just a few kilometres rain can alter by up to a metre and there’s huge differences between neighbouring properties sometimes. There’s patches of really good dirt and more challenging pakihi and sand – all with completely different farming systems. It doesn’t take much to have a huge variance with a farming system.”
Three very wet seasons, followed by a drought last year and compounded by lower payouts has taken its toll on financial performance and Leslie says farmers have had to defer maintenance.
Farmers are still trying to recover from the 2015-16 season payout and the break-even milk price for the average West Coast farm for the 2017-18 season was $5.38, with the final result $6.07. She says this prompted people to start paying down debt because with a debt/equity ratio of 61% (West Coast average from DairyBase), farmers are playing catch up.
“The cost of the land is lower, but they have higher debt so the debt to equity ratio is above the national average,” she says.
While most West Coast farms don’t have the cost of irrigation – and those that do irrigate in drier parts usually irrigate for a couple of months, depending on the season – there are other costs such as track maintenance in a high rainfall climate and often stretched-out farms up valleys. Leslie says there are often unavoidable costs, regardless of the number of cows milked, due to the nature of the farms and how they have evolved over time.
Distance and isolation impacts on transport as well and she says it costs about $50 a tonne to freight product such as feed to Westport and $80/t to take it north to Karamea.
That isolation is part of the appeal and she says she wouldn’t live anywhere else.
“I love it, even with all the challenges. I don’t think you’d get too many people looking to move off the Coast. I do enjoy the isolation. You can be on your own away from the world or be with people if you want and there are great little communities all around the Coast.”
Isolation and visions of never-ending rain does turn many potential buyers away from the Coast though, despite the prospect of cheaper land. So Canterbury-based Gareth Cox from Property Brokers organised a tour to the Coast for potential buyers to show them what their money could buy and what they could achieve.
He is targeting the younger, next generation of farm owners and says there are farms in some of the better areas of the Coast producing 800-900kg MS/ha that can be bought for $20,000 to $21,000/ha – and that’s including dairy company shares.
“I’ve sold farms in the past around Hokitika to Canterbury farmers who have done really well. You just have to knuckle down. They certainly wouldn’t have their own farm without going there. And they all say ‘we’ve got our lifestyle back now; time with the kids’.
“There are challenges with climate and schooling options are more limited for secondary school. And there are prime areas people prefer to be because they’re nearer services and more reliable production. And that’s the Achilles heel for places like South Westland. Yet people who live there love it. You just have to be resourceful.”
Shari Ferguson says there’s always been opportunities on the West Coast. The difference now is that the values have changed which makes it an even better investment. She describes one of properties on the market which is milking 740 cows this season on 286ha effective, has six centre pivots, a 500-cow concrete feedpad and is set to achieve 300,000kg MS. All for $7.65 million or $26,748/ha, including milk company shares. Historically, it would have been more than $30,000/ha, she says.
That’s a property with a lot of development carried out since its conversion in 2006, with all the mod cons in the 50 bail rotary dairy. Whereas there’s the cheaper properties that haven’t had much money spent on them for a while, but pose opportunities for production gain.
“There’s plenty of properties that need things like regrassing and that’s a no brainer for increasing production.”
Ferguson says outsiders so often rule the Coast out without even looking at it and while it does have high rainfall, it also has some of the hottest temperatures in some of the many microclimates spread through the region.
Tony Finch sees the Coast as a region of opportunity for the dairy industry and despite its rain-hammered image, it remains a stunning environment for those willing to take on the challenge.
“It’s a glorious place with a wonderful environment on your doorstep. It really is a one-in-a-million place; a magic place.”
