Dairy businesses managed by corporate structures are proving to be more resilient to global dairy price slumps than family-operated entities, according to ANZ.
The findings come in the ANZ's annual 'Privately Owned Business Barometer'.
The country’s biggest rural bank lender, which has about $11.3 billion of lending exposure to the dairy sector, has surveyed 368 respondents from across the dairy industry (farming and support), including small-medium sized businesses, commercial businesses, farmers, and Maori businesses, via an online survey.
It concludes a larger portion of the surveyed dairy businesses, managed by boards, grew their profits over the past year, than those that weren’t managed by boards.
On the flip side, a smaller portion of business managed by boards saw their profits decline, than businesses not managed by boards.
More businesses with boards saw no change to their bottom lines than those without boards.
ANZ says, “In businesses with larger, more corporate structures and businesses with boards, there is evidence of the value of the more formalised business management and decision making processes. These ‘corporate’ processes are often very different to what many farmers are used to.
“However, most see this as a positive change as they impose disciplines on the business that are both necessary and beneficial – and data from the Barometer indicated that they have a beneficial impact on the bottom line.”
Looking at the stats again, a larger portion of dairy respondents with boards calculated their operating profits on weekly, monthly and quarterly basis, while a larger portion of businesses without boards did these sums on a half-yearly or annual basis.
The results are similar when looking at how often dairy businesses calculate their returns on assets. While the majority of respondents did these sums annually, those with boards did the maths more regularly.
ANZ notes 30% of its respondents have boards, reflecting the size and complexity of some dairy businesses, and the growth of new ownership structures such as equity partnerships.
It says these provide an alternative path into farm ownership, and are a means of succession.
Traditional family farm ownership not the norm in the future
Having helped finance over two thirds of all rural equity partnerships in New Zealand, ANZ says the increasing amount of capital tied up in a farming business means traditional family ownership may not remain the main form of land ownership in the future.
It says, “Most equity partnerships have boards, and it was interesting to note that equity partnership respondents… showed quite a different result to that from family businesses.
“The increased scrutiny boards place on budgets and results caused equity partnership farm managers to examine and prepare recommendations more thoroughly, and with more analysis.
“It was expected that current commodity prices would most impact large-scale South Island dairy operations converted in the last decade, but there was some feedback from advisers that family farmers are finding conditions a greater challenge for this reason.”
Grim outlook
ANZ says it’s noticed those in the agri industry change their mindsets and focus more on profit.
This is perhaps no surprise given the fall in global milk prices demonstrating the volatility of the market, and the fact the industry’s facing increasing competition in global markets, with the removal of milk quotas in Europe and the growth in large-scale operations.
Fonterra last month issued its opening 2015/16 farmgate milk price forecast at $5.25 per kilogram of milk solids, and cut its forecast for the previous season to $4.40 - an eight-year low.
Furthermore, the industry’s being grilled on whether it’s reaching its production limit from an environmental perspective, raising the question of where growth should come from.
Accordingly, ANZ concludes 42% of survey respondents saw a reduction in profit last year compared to 27% for other agri sectors.
It believes dairy farmers will experience an average income reduction of $292,000 in the middle six months of 2015, compared to the same period last year.
“As a result, DairyNZ is predicting that many will remain in overdraft for the whole year rather than returning to the black at some stage during the summer months, as per the normal seasonal cycle”, it says.
ANZ points out low interest rates mean debt levels aren’t as much of an issue as they were a decade ago.
“However 25% of farmers have debt of $33 per kilogram of milk solids produced, and this is difficult to sustain in anything but the most efficient of operations. The high pay-outs of 2013-14 have provided some wriggle room for farmers – but this has now run out in the 2015/16 dairy season.”
ANZ says that while respondents saw decreased profit growth in the short and medium term, they were more upbeat about the longer-term (3-year) prospects.
Rabobank has reached similar conclusions in its quarterly ‘Rabobank Rural Confidence Survey’, also released today.
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