Liquidity Both Ways

Acquiring farms is not like trading futures. I know because I have done both.

Liquidity is often mentioned in the context of farmland and its relative lack thereof. When people do mention this however it does not seem to extend to the other side, i.e. buying not selling. The implication being that when you wish to buy there will be a positive river of exceptional asset availability. Of course there will…or maybe not.

Farmland is not futures, it is never a case of “it’s 15-16 shag, a 1000 up, what do you wanna do?” As an explanatory aside it was open outcry in my day rather than the glamour of a humourless flickering screen.

The point being, don’t expect to waltz in and pick up premier assets at exceptional prices just because you deem it to be ‘the perfect time’.

Active not Passive

The way to access the ‘NZ dairy trade’ and in fact to create any solid pipeline of farm assets is to participate, not watch from the side-lines hoping for ‘a sign’. You have to be actively involved and ‘ingrained’ into a market to best be able to judge that market and execute an effective acquisition strategy.

It is also worth pointing out in the case of the ‘NZ dairy trade’ that it is not worth participating if the basis of the desire to allocate is simply that this is a cyclical downturn, so therefore ‘let’s get in’. The problem with this theory is that the intensive conventional dairy ‘management strategy by numbers’ approach (yes it can be intensive even if the cows are outside on grass) is delivering impressively large losses in a sector of high debt.

As we have outlined previously, it is important to get your farm operational strategy right as a first step.

A granular level of understanding of a region’s climate, soil, people (bankers, agents, farmers etc.) the processors, quality of infrastructure (schools etc.) need to be automatically part of the process. This is the means to identifying and securing good assets at good prices, which given the profitability advantages of organic production, is all that is needed. There is no need to try and ‘pick the bottom’, which anyway is not a phrase that sits comfortably when considering investing in enterprises involving cows or sheep. Understand and identify value, leave bottoms out of it.

Only When Available

Being actively involved with ‘boots on the ground’ better enables access to deals that may not normally be visible and it puts you in a better position from which to make good early judgements on an asset’s relative attractiveness.

In waiting for a particular price outcome or level, you run the risk of missing good assets. In 2008, post the GFC dip, the ‘bottom’ was characterised by the almost total lack of asset availability. You may have been able to identify the bottom but there were no assets to acquire.

It may be that good assets have been available at good valuations on the ‘way down’ and that all that is left are poorer quality assets or, as described above, there is effectively nothing available. If you are not involved you have no way of knowing.

More active involvement also creates additional leads, for example with farmers neighbouring properties of interest, which opens up opportunities for growth/asset consolidation. Once an acquisition is made this factor would be expected to be a significant means to expand the portfolio.

There is an old rule (and it is a good one) in farming that cheap land is often the most expensive. The point being made is that the quality of land is critical to performance outcomes. Some land you could obtain for free and you still will have overpaid.

Right now asset availability is good in terms of volume and quality and there is a strong case for acquiring assets. There are not many other buyers and the current environment allows for the ability to ‘pick off’ the good ones. It also avoids being caught in the scramble on the way up and gets you in organic conversion earlier, with the enormous incentive of the large income advantage organic production delivers. Without that edge, the whole process of investing in NZ dairy is pointless at best and extremely costly in terms of large operating losses at worst. As so many are currently learning.

Key Points

Being active at the grass roots in the current environment provides an insight into the pressure on the dairy sector (and individuals) and asset availability. We believe that the NZ dairy situation is worse than is being publicised, which means it is a better time to be participating in the market than it may seem and it is reasonable to suggest that it already looks quite compelling.

Requirements for acquisition success:

  • Being active in the market (viewing, talking, diligence), and with an existing attractive pipeline.
  • Understanding the assets and location (climate, soil, infrastructure).
  • Recognising value and quality, not just price.

The critical point to understand is that now is the right time to be viewing and evaluating assets with the intention of allocating/acquiring. This requires commitment and action, not observation.

The Right Time:

  • Availability of attractive assets is good, generating corresponding pipeline strength.
  • The market is distressed; debt and poor (loss making) conventional economic performance, is impacting on asset prices.
  • Superiority of organic economics at the operational level is delivering marked superiority of return performance.