Businesses replacing people down on the farm

New Zealand's dairy farming population could halve in a decade, says Fonterra chairman Henry van der Heyden.

It's not because of threats to the farm business far from it. Farms are getting bigger and their ownership is consolidating among a shrinking number of major players.

The trend towards mega-farms is already creating some huge, farm-based business empires and attracting the attention of corporate investors keen to taste some cream from the dairy industry's profits.

The biggest dairy farm businesses, such as those controlled by Fonterra director Colin Armer and Timaru-based accountant Allan Hubbard, own thousands of hectares of prime dairy land around the country and are likely to have annual revenues approaching $100 million, placing them among the ranks of this country's biggest businesses.

Consolidation of farm ownership in fewer hands has been happening for many years but is gathering pace as high dairy prices help push up the value of land and smaller farmers decide to sell their family farms to their bigger and more prosperous neighbours.

The result for the dairy industry is that the big are getting bigger and the small players are leaving.

"I think the business model is actually changing," van der Heyden said.

"I think this is a general business trend. The businesses need to grow and their scale gets bigger and bigger."

Fonterra processes about 95% of the milk produced in this country and the trend shows up in the shrinking number of its farmer shareholders, even as the volume of milk it is processing continues to increase.

In 2003 Fonterra had 12,600 suppliers, but that has since declined to 10,500.

Asked where that trend could end up, van der Heyden said: "No one knows. But I think in the next 10 to 15 years you are probably going to have 4000 to 5000 [dairy] farmers in New Zealand."

Changes of that scale will not only have a major impact on the business structures of farms but will also cause major changes in smaller rural communities.

Federated Farmers president Charlie Pedersen, who has a mixed dairy and beef farm at Himatangi north-east of Palmerston North, said it was an ongoing challenge to maintain membership numbers for the federation.

"About 1500 members write to us every year and say thanks for the service, we've been members for 25 years but we've sold our farm to our neighbour and he's already a member. So we are chasing our tail to try and find 1500 new members to hold our numbers and it's a game of diminishing possibilities," he said.

Pedersen's own farm reflects the trend. He followed the traditional route into dairying, starting as a sharemilker before buying a small farm, then buying a bigger one and over the years adding to it by acquiring neighbouring properties.

His family's farm was once nine separate farms, each owned by a different family.

As chairman of the local school board, he is aware of how the loss of so many families from a community can affect its ability to maintain social services such as schools and health care.

Fortunately help has come from an unexpected quarter.

"Farmers get irritated by lifestyle-block owners but I celebrate them because otherwise we would have lost the school," he said.

Farm amalgamations could also result in farm houses on small plots of land becoming surplus and these were often sold or rented to city dwellers seeking a better life in the country.

"These people have invigorated our communities.

"It means our kids have gone to school with all sorts of interesting kids compared to 30 years ago," Pedersen said.

There are many reasons that existing farmers are deciding to sell.

"Increasingly, farm kids have gone off and become architects or scientists or some damn thing and although they love the farm, they are not keen to come back and give up their new lifestyles."

So when the parents want to retire, they often have no choice but to sell.

But that decision was often underpinned by a harsh economic reality.

"When I started farming 31 years ago the average dairy herd size was 125 cows. Today it's 347 and even at that size you are really just scratching along," Pedersen said.

He estimated that the disposable income generated by an average-sized herd would be about the same as that of a city couple with incomes from jobs like teaching and administrative work.

And smaller farms had become the rural equivalent of the corner dairy. In such cases, even if the children were keen to take over the farm, the banks may be unwilling to fund the transfer because the farms were not economically viable, so the only alternative was to sell into a bigger concern.

"The saying in farming is that you are either growing or going," Pedersen said.

As farms get bigger, so does the cost of buying them and average-sized dairy farms can change hands for several million dollars. Bigger farms, with 500 or more cows, can sell for more than $10 million.

Increasingly, farmers are turning to city investors to finance such deals.

AGInvest is a company that brings together syndicates of investors to purchase dairy farms, which AGInvest then manages under contract.

The arrangement is exactly the same as the more common commercial property syndicates which are put together by investment companies such as St Laurence, to own properties such as office buildings and warehouses. But they are becoming an increasingly common feature of the dairy sector.

AGInvest director Andrew Watters said the company currently managed about $250m of dairy farm assets on behalf of investors.

People selling their farms to AGInvest were usually family owners, Watters said, while the typical mix of investors buying into a syndicate was about 50% existing dairy farmers; 5% to 8% sheep and beef farmers looking to diversify their holdings; about 20% rural professionals such as accountants and lawyers who worked in the agricultural sector; and the balance of slightly less than 25% being urban investors, most of them wealthy individuals.

Chris Kelly, the chief executive of the country's third-largest dairy farmer, state-owned Landcorp, is also seeing increased interest from non-farming investors keen to get involved in the dairy sector.

Landcorp milks 46,000 cows and last year turned an operating profit of $30.1m, although that also included contributions from its extensive beef, sheep and deer farms.

The company's success shows that

it is possible for a corporate owner to make money out of farming.

"I think over time there will be more corporate farms," Kelly said.

"We've had a lot of interest from a number of investors looking to invest in agriculture, saying `look, you are a big player. Help us to understand what farming's about and help us invest'."

That interest had come both from local and overseas investors, he said.

Others are not so sure.

Pedersen believes that only traditional family owners are prepared to endure the lean years which invariably occur as part of the farming cycle.

"Only family businesses are prepared to put up with year after year where you actually make cash losses," said Pedersen.

"An outside investor will not put up with that."

 

- © Fairfax NZ News