20 Mar, 2014
MURRAY Goulburn (MG) expects to grow its equity partnership program between family farmers and outside investors to become “a whole lot bigger”, according to shareholder relations manager Robert Poole.
“We didn’t have to go looking too hard for the money - it came to us,” he said.
Mr Poole said agriculture badly needed a capital booster shot worth tens of billions of dollars before 2030 if it was to gear up adequately to take advantage of consumer and supply chain demands ahead for Australian food producers.
“These are huge numbers,” he said.
“We can’t expect the mums and dads running our farms to borrow all that money to fund the next generation of dairy growth in Australia.”
While Australian investment groups were generally “gun shy” about putting money into farming ventures, overseas investors had shown confidence in using Murray Goulburn to identify good farmers with good reporting and management track records who would benefit from equity help.
“Big investment companies like dealing with big companies, so they’ve brought the investment projects to us - a $2.4 billion business with a good understanding of what’s needed on both sides,” Mr Poole said.
“They see family dairy farmers as the best people to operate their assets.
“It’s a very exciting project with huge potential to grow among our suppliers.”
Mr Poole acknowledged good corporate dairyfarming operations also existed in the industry and could also attract rising interest from investors betting on the milk market’s bullish market prospects, “but I think family farming enterprises do the best job”.
Mr Poole said Australia’s dairy farm sector needs two key ingredients to thrive during the next 20 years – milk and new investment backing for family farms.
MG estimates every Australian would be, on average, more than $800 better off today if the nation’s dairy farmers hadn’t quit the industry in droves during the past decade.
Instead of maintaining a respected 15% share of global dairy export markets, Australian milk production has been slipping 1.7% annually, despite a big surge in world dairy product demand in the past five years.
Australia now supply just 7% of the international trade.
Across the Tasman Sea, New Zealand has been doing the opposite, converting beef and sheep country into dairy farms and growing its annual production by about 3.5%.
NZ’s share of the global milk product trade is now 37% - up from a stake similar to Australia in 2002.
Milk exports are now turbo-charging the kiwi economy, with the sort of growth experienced by Australia in the recent mining boom, including pushing value of the NZ dollar to 40-year highs.
Growth in demand for dairy foods is forecast to be more than double that of the next two fastest growing food categories combined by 2020, dragged along largely by demand from China.
Chinese imports of dairy foods were worth just $309 million in 2001, but by last year had soared to $US6.2 billion.
“Dairy is truly an amazing story of growth,” Mr Poole said.
“It really is so huge.
“Unfortunately we have not been in a position to take advantage of it, but NZ saw the chance and grabbed it.”
A difficult decade of drought, milk market deregulation, a rising Australian dollar and low farmgate milk returns eroding farmer confidence levels had convinced many producers it was time to stop milking, sell their farms, sell irrigation water rights or semi-retire.
“None of this makes sense for an Australian industry with such a great outlook,” Mr Poole said.
“We need to reverse the trend and get farmland back into dairy production.
“Getting people to invest in dairy again is going to deliver an incredible prize.”
He said a 3.5% compound increase in annual production would deliver an extra $5 billion a year to the national economy from export earnings by 2020.
To reclaim 15% of the global trade by 2030 would bring in $11 billion - equivalent to an extra $824 per capita every year.
Mr Poole admitted it was an “incredibly audacious goal”, but his farmer-owned co-operative – arguably Australia’s biggest food business – was determined to do its bit to encourage as much production growth as possible.
A key plank in MG’s strategy is to promote growth by providing farmgate pricing confidence to its expanding supplier network in NSW, Victoria, Tasmania and South Australia.
This trading year MG suppliers would be p
aid 50 cents a litre – a near record – and the company’s objective was to increase its milk price by a further seven cents a litre (equivalent to $1/kg for milk solids) to encourage a turnaround in supply volumes.
“We can create so much more income per hectare from dairy cows than from sheep or beef cattle - we’ve got to get the land lost in the past decade back in production,” Mr Poole said.
Research by corporate consultancy Port Jackson Partners estimated dairy needed about $16 billion in new capital funds to enable Australia to regain its lost export market share by 2020.
However, a major hurdle to farm productivity growth was the long tradition of funding farm expansion with borrowed money.
Debt-heavy farmers were vulnerable to droughts and price volatility, which put the debt-funded growth model under stress.
Farmers were becoming reluctant to move quickly to take on bigger investment risks even if long-term market prospects were appealing.
MG believed the most obvious alternative to blowing out farm debt even further was to encourage outside equity into farming, particularly when farmers needed more land to lift production.
Since 2011 a partnership program coordinated by the big co-operative has increased milk production by up to 28 million litres a year by drawing in $20 million in European equity to pay for farmland acquisitions adjacent to or nearby existing MG suppliers in Victoria.
Mr Poole said superannuation investment groups now owned land that was leased at market rates direct to nine highly credible farming family operations.
The deals provided fund managers with solid annual returns and long-term land value gains, while the farmers were able to limit their borrowings to funding new machinery and buying more cows.