Agriculture has a chequered history of poor returns for outside investments in rural land and this article raises the question will the investment in Pastoral Dairy Investments be any better?
Returns in farming have historically been low and when fees and management costs are taken off the bottom line, these sort of operations historically have proven to struggle.
MyFarm 's executive director states that their debt free acquisitions set it apart from other ventures, but most farmers know that any development no matter how carefully planned, seems to always struggle to hold costs to budget. The question could also be asked ''Are milk products on a downward cycle of agricultural commodities driven by global increases in production and coupled with cost increases will margins be squeezed?"
Is the timing right for this sort of investment into the dairy sector and does the return reflect the risk? Share with us your optimistic or pesimistic views on the challenges this venture may face.
A month after Pastoral Dairy Investments' fund launch - seeking to attract more than $75 million to $100 million in start-up capital - analysts are still number crunching the details. Questions arise over capital gains issues, complex fee structures, estimates on some expenses and where Pastoral Dairy Investments (PDI) will offer value, when other investments such as NZ Farming Systems Uruguay, Tasman Agricultural and Dairy Brands left start-up shareholders out of pocket reports The ODT.
PDI estimates a yield of about 10%, pre-tax and fees, annually, with quarterly dividends to be paid through Fonterra's monthly payments. On one hand, demand for PDI's prospectus during its country-wide roadshow has prompted the potential for a second print run and more than 850 inquiries so far, while recent headlines reflect a strong global dairy demand which is underpinning the economy. However, in the South, financial analysts specific to the dairy sector are lukewarm to the idea of the PDI fund, its associated costs, fees and potential yields.
New Zealand is not alone in dairying achievements globally. The majority of other milk producing nations, except China, have all boosted milk production during the past year. With the fund closing date not until April 20, potential investors will be holding on to their cash and it will be some time before actual investor numbers and their extent is known.
MyFarm, which has its own separate 47-farm fund, will manage the PDI farm stable. Executive director Andrew Watters is one month into a gruelling countrywide roadshow, having made about 20 presentations to brokers, farmers and small investors. He maintained PDI's debt free farm acquisitions, a low cycle in farm prices, MyFarm's management experience and medium-term strong global dairy demand underpinned by Asia boded well for investment.
Historically, start-up investors in other companies have come unstuck. When NZ Farming Systems Uruguay and Tasman Agricultural raised money, the shares then traded at discounted rates respectively more than 20% and 38% below net asset values. While PDI had maintained the offer was medium to long term to get greatest benefits and should be considered illiquid, one analyst highlighted that the PDI fund would be so illiquid that if for some reason an investor had to exit in a emergency, they could be "well out of pocket".
Mr Watters said unlike PDI, those companies - and he also added in Dairy Brands - carried high debt levels on establishment, never paid dividends and in some cases used 50:50 sharemilkers who took more than 50% of profits. The Farming Systems Uruguay model, while "pioneering", was based on cheap land overseas and on an unproven business model with no track record.
He rejected the suggestion that, while the fund was subject to a wide number of variables which could affect dividend yields, the fee-take for PDI remained relatively static.He said the supervision fee of 5% based on the milk price would be less for PDI if prices fell and the 12.5% earn-out payment for PDI at the point of farm sale was subject to that farm having gained shareholders a pre-tax internal rate of return of at least 8%.
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