Are Conventionally Managed Dairy Farms at Risk of Becoming Stranded Assets?

Stuck in a system that is no longer working from a regulatory, financial, environmental or operational/management point of view?

In many catchments, intensive dairy farming systems are over, even if that is not being recognised by the operators (although increasingly it is).

The positive is that individual assets, i.e. farms, can still be sound with the potential to be well performed properties. It is the management system that makes them stranded. If soil, water, climate and location are as required, then all it takes is the right management system and time. How much time depends upon how addicted to inputs the land has become and therefore how biologically/ecologically degraded.

The management system is the trick. It seems an easy thing to change but it is not. Businesses will go bust before they change. This is because the top two inches can be the toughest part to convert and the most important.

This creates an opportunistic window for those able to recognise the change needed and with the knowledge required to execute the management strategy that will turn a ‘stranded asset’ into an outperforming high value production system.

For marginal assets – as evaluated according to their topography, soil, water, climate and location etc. it is not so much about being stranded as about needing to change how they are utilised. The potential risk is a drop in land value. The largest drop in value generally comes about in NZ, if land moves from pastoral to forestry. If carbon becomes a factor however, and its pricing starts to reflect our climate change impacted reality, then that value loss may not be as great as feared. It could even be that it becomes a higher value system than that currently operating on the land. There is also the prospect of implementing agroforestry systems such as silvopasture and silvoarable.

In our view an asset becomes stranded as a result of a failure to recognise the need to change the management system or perhaps more likely it is recognised that something needs to change but the knowledge required to execute the required transformation is lacking. This can lead to a situation where asset prices decline as they are priced according to the historical and still dominant operating system, which is no longer economically optimal.

This creates not only a buying opportunity but also the means to capture higher value outcomes for better adapted regenerative, ecological management systems.

Therefore, an asset potentially becomes stranded as a result of its management system and not adapting to the changing regulatory/environmental requirements that now, and will increasingly, apply. Phasing out palm kernel and riparian planting is not system change, it is fabric and deck chairs. In essence, this is making intensive management a stranded strategy but, as it is largely the prevailing model, this will negatively impact on asset prices as a result of the combination of rising costs, reduced buying demand (for land), high levels of debt, aging farmers and lower value production (and greater commodity price volatility).