The winter has been cool but relatively mild; at least it has been in Hawkes Bay.

The rest of the country has had the odd extreme event but nothing calamitous or damagingly serious. North Canterbury is still dry and the concerns in the farming sector in that region are not easing particularly with an El Nino event brewing.

Dairy

The milk price has collapsed and the pessimism has risen. The media talks as if the banks are benign friendly uncles who will help farmers through. Are they serious? Perhaps those commentators are just short and narrow of memory and experience. We have already had bankers call us to tell us of assets that are ‘available’. The milk price reality, i.e. the lowest in over ten years, high industry debt and a significantly cheaper NZ dollar make the current environment appealing for investment allocation in our opinion.

An overriding lesson to learn from the current trauma of the dairy sector is the folly in pursuing intensive, yield obsessed, input dependent farming systems. This has become the new normal over the last ten years and certainly even where it is presented with suitable greenwash – glossy ESG reports and references to that most degraded of words ‘sustainability’ – it has been a failure environmentally in managing exposure to future developments (water regulations) and now under pressure financially.

A system that only functions financially when record high prices are being achieved is one poorly adapted to agricultural and farming reality. It may be a result of hubris, greed or ignorance (or all three) but standing naked with a production cost of $5.40/KgMS when the forecast payout is $3.85/KgMS, the high input approach is exposed as the Emperor’s new clothes.

Such is the degree of stress that it even has some arch proponents of this methodology publicly moving away from the high input approach, although ensure you have sufficient salt reserves while ingesting such pronouncements.

It is very noticeable that, amongst all this wringing of hands, the organic price premium has gone up and not just as a % of the milk price but the actual additional money paid to organic producers has increased (twice) in the last 12 months.

The increased price premium of $1.75/KgMS for organic milk (a 46% premium!) provides clear evidence of the organic market’s superior performance.

Lower production cost + higher value output = superior returns.

“I love the smell of ecology in the morning…..smells like victory.”

Milky Bar Doom

Permanent

Permanent cropping on the other hand looks good. Grapes look good, apples are doing well – although we think this sector is already sowing the seeds for its next collapse (a standard cyclical occurrence in the apple industry) and kiwifruit looks excellent and with a far superior industry model and position to apples.

There has been almost no offshore investment penetration into the kiwifruit market which is small and fragmented. For AE, the current availability of properties, both existing and development, is exceptional – the benefit of an active grass roots presence.

With annual returns in the mid-teens (and more) being achieved it is hard to argue with. This is supported by an industry structure and developments (new licenced varieties etc.) that augur well for the future and an avoidance of the dramatic milk price volatility and the dramas potentially awaiting the apple industry, at some point in the future.

As per our Art of Income article, we believe the permanent cropping sector in NZ is an excellent and consistent generator of income. It can however be challenging to access due to its fragmented nature, with good investable scale opportunities tending to be relatively rare, hence our excitement with the current environment.

Beef/Sheep

Sheep/beef farming offers less than inspiring standard return figures and a prospective drought in the coming season.

But right now we think the beef/sheep enterprise sector presents a compelling investment case.

The well-known secret, at least to those active on the ground, is that beef/sheep production in NZ, offers the potential to consistently generate 7-9% annual cash yields, well above the fairly uninspiring standard industry figures.

There are geographical areas of value which allied with offtake agreements, specialist markets, scale of operations, operational asset integration and the professionalisation of management, enable the establishment of a secure and robust income generating portfolio.

Those returns identified above are not what we think can be delivered; they are what is actually and consistently being achieved by good operators.

As we have also mentioned many times before, beef/sheep fits very well into a dairy farming programme. So in fact the reality is in NZ, you should think in terms of pastoral production rather than just dairy, as in our opinion you require the presence of sheep/beef type assets in the mix for effective operational optimisation. If you are not approaching it in this way it suggests too much top down and not enough bottom up thinking in your allocation process.

The challenge for existing practitioners this coming season is the prospect of El Niño, particularly for those on NZ’s east coast, as that tends to experience unusually dry conditions during El Niño. System resilience will be the key to success.

New season lambing is underway and the early reports are all positive so at this stage it seems like a good start to the season. Whilst lamb prices were not much to write home about last season, beef has performed very well (demonstrating the benefits of enterprise diversity).

Farmers in this sector are not noticeably complaining, which is a tell-tale that things are actually going reasonably well.

Overall the industry is looking in unobtrusive good heart.