The promotors of the abandoned Pastoral Dairy Investments (PDI) float are giving investors another chance to invest in the dairy sector through the syndication of a North Canterbury farm.

PDI had hoped to raise $75 million to invest in dairy farms ahead of a planned listing on the secondary market, but the scheme was abandoned in May as investors remained wary in the face of falling milk prices and the uncertain economic outlook.

PDI was promoted by MyFarm Asset Management which is a joint venture between farm syndicator MyFarm Ltd and businessmen Neil Craig (the chairman of Craigs Investment Partners) and Brian Cloughley (a former director of Craigs).

MyFarm Asset Management has now come up with a more modest proposal to raise up to $2m, which will piggyback on a new syndication MyFarm Ltd is putting together.

MyFarm Ltd is looking to buy a 216ha dairy farm at Culverden in North Canterbury which it will put into a syndicate structured as a limited partnership - the Harakeke Dairy LP.

The scheme is aimed at investors who meet the "eligible persons" criteria of the Securities Act (which negates the need for a prospectus) with the minimum investment set at $250,000.

People with as little as $20,000 to invest will also be able to take part through another investment vehicle called HLP Investments LP (set up by MyFarm Asset Management) which has also been structured as a limited partnership.

This entity will then invest in the Harakeke syndicate, with the effect that the smaller investors will invest in a limited partnership which in turn invests in a bigger limited partnership, which owns the farm.

Whether they have $250,000 or $20,000, all investors will need to meet the "eligible person" test.

Cloughley said promotion of HLP Investments was being restricted to people who had expressed an interest in buying into PDI, which also had a minimum investment threshold of $20,000, and to clients of Craigs Investment Partners.

Apart from the double layer of limited partners, the structure of the Harakeke syndicate is relatively straight forward.

A total of of $13.77m is being raised, $9.25m from investors and $4.52m of debt, which will fund the purchase of the land ($9.5m) livestock ($1.87m) Fonterra shares ($1.55m) plus plant and equipment, with an allowance for working capital and establishment costs.

That makes for a gearing ratio of 33 per cent.

MyFarm usually targets properties where there is significant potential to increase production, which, all other things being equal, should lift their income and increase their capital value in the process. But Harakeke is already achieving very high production volumes.

While that limits its growth opportunities, the trade off is that it also reduces development risk, allowing investors to buy into something which is already achieving attractive returns.

MyFarm's cash flow forecasts estimate that it will provide investors with gross cash returns (yields) equivalent to 6.5 per cent in 2013/14, rising to 14.8 per cent in 2016/17.

It is these relatively high returns, compared with fixed interest investments such as bank deposits, which are making syndicated investments in farms and commercial properties attractive to many investors at the moment.

With a commercial property such as an office or factory building, the main risks relate to the quality of the tenant and their lease.

With dairy farms, the main risks arise from movements in the milk price and the ability of the farm manager to contain costs.

MyFarm has based its projections on being able to lift production from 1618kg of milk solids per hectare in 1012/13 to 1679kg/ha in 2016/17 and on Fonterra's milk price coming in at $5.50 in 2012/13, then rising steadily to $7.31kg in 2016/17.

At current costs, Harakeke's break even point was a milk price of $4.50kg.

That forecast may be optimistic compared to the expectations of many farmers, with a survey released by Federated Farmers last week which showed that 58.2 per cent of dairy farmers are expecting their own farm's profitability to worsen.

However, MyFarm director Andrew Watters said the company was basing its projections on the effect the current drought in the United States was expected to have on world dairy prices.

The drought is being described as the worst in the US since 1956 and Watters said it would not only affect US dairy production, it would also increase the cost of stock feed which the US exported to other dairy producing nations.

Those factors combined should help to lift world dairy prices, he said.

"It's dependent on supply and demand and that will go up and down. A month ago we were facing an uncertain outlook but the drought [in the US] has had a very positive impact on us," he said.

Watters said the number of farms being syndicated had fallen by about three-quarters since 2007, but most of the decline was in private syndications being undertaken by families or small groups of friends and neighbours.

"But in terms of of professional syndicates, we've kept operating right through, so we've been largely unaffected," he said.

"Dairy is not without risk, but we do have a competitive advantage in New Zealand and a strong growth outlook, albeit perhaps a bit weaker than we thought pre-GFC. But at least it's still a growth outlook."

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