DAIRY PROPERTY MARKET REVIEW - Colliers · Colliers International Rural & Agribusiness | Dairy Land...

DAIRY PROPERTY

MARKET REVIEW

CanterburyOCTOBER 2018

CRIGHTON ANDERSON PROPERTY & INFRASTRUCTURE LTD.

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COLLIERS INTERNATIONAL | RURAL & AGRIBUSINESS VALUATION

OCTOBER 2018

Colliers International

Canterbury Dairy Property Market Review

SECTOR OVERVIEW

MAIN DAIRY REGIONS

MARKET OVERVIEW

MAJOR TRANSACTIONS

IRRIGATION

FARMGATE PAYOUT

INTERNATIONAL INVESTMENT

CANTERBURY MODEL DAIRY FARM INDEX

FUTURE OUTLOOK

Market overview Major Transactions

Colliers International Rural & Agribusiness | Dairy Land Values Review: Canterbury 2018

Main dairy regionsSector overview International investment Canterbury Model Dairy Farm IndexFarmgate payoutIrrigation Future outlook

Waikato 2.92 cows per ha on average 331 average herd size 369 kgMS/cow on average 1075 kgMS/ha on average 22.3% of total mild solids production

Taranaki2.78 cows per ha on average 286 average herd size 383 kgMS/cow on average 1067 kgMS/ha on average 9.8% of total mild solids production

Canterbury3.31 cows per ha on average 759 average herd size 421.50 kgMS/cow on average 1395 kgMSha on average 20.9% of total mild solids production

Southland2.69 cows per ha on average 569 average herd size 415 kgMScow on average 1117 kgMS/ha on average 12.6% of total mild solids production

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AVERAGE COWS PER HA

0.00100.00200.00300.00400.00500.00600.00700.00800.00

AVERAGE HERD SIZE

North Island59.60% of dairy cows 61.40% of dairy land 2.73 cows per ha on average 340 average herd size 362 kgMS/cow on average 987 kgMS/ha on average 55.6% of total mild solids production 1,060,643 ha total effective area

South Island40.40% of dairy cows 38.60% of dairy land 2.78 cows per ha on average 611 average herd size 409 kgMS/cow on average 1203 kgMS/ha on average 43.4% of total mild solids production 668,059 ha total effective area

New Zealand2.81 cows per ha on average 414 average herd size 381 kgMS/cow on average 1071 kgMS/ha on average 1,728,702 ha total effective area

Milksolid production in New Zealand is dominated by the four key dairying regions of Waikato, Taranaki, Canterbury and Southland which account for over 65% of New Zealand’s total production. The Waikato leads the way contributing 22.3% of overall production, with Canterbury close behind on 20.8%.

Whilst the Waikato is a traditional dairying region, dairying in Canterbury has rapidly grown over the last 25 years, supported by the availability of irrigation water and larger landholdings suitable for dairy conversion. Whilst the shifting environmental awareness and concern for waterways has significantly slowed the pace of new dairy farm conversion, the region boasts some of the most technologically advanced and productive farms in the country.

Canterbury dairy land supports an average of 3.31 cows per hectare and provides for an average of 1,395 kgMS per hectare, compared to the Waikato farms supporting 2.92 cows per hectare and 1,075 kgMS per hectare. Per head production is greater in Canterbury at 421 kgMS/cow compared to 369 kgMS/cow in Waikato.

The average farm size is larger in Canterbury and because of the greater production and relative ease of management the region has become favoured for corporate and international dairy investors. Whilst there are some notable larger scale farmers in the Waikato, the relatively high land values, smaller farm sizes and demand from alternative land uses generally mean that the regions farms are largely held by smaller family farmer operations.

Like Canterbury, the Southland region experienced a dairying boom through the 1990’s and 2000’s, whereas Taranaki exhibits the same traditional smaller family farmer characteristics as the Waikato.

These differences between the regions explain some of the relativity in dairy farm values.

Sector overview

0.00200.00400.00600.00800.00

1000.001200.001400.001600.00

AVERAGE KG MILKSOLIDS PER EFFECTIVE HA

330.00340.00350.00360.00370.00380.00390.00400.00410.00420.00430.00

AVERAGE KG MILKSOLIDS PER COW

% MILK SOLIDS PRODUCTION PER REGION

Canterbury

Southland

South Island - the rest

Waikato

Taranaki

North Island- the rest

Data source: Colliers International Rural Valuation. MPI

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Main dairy regions in New Zealand

CANTERBURY 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18

Number of sales per year 13 2 7 19 18 28 18 15 17 15

Total value of transacted land $110.1m $17.2m $51.6m $132.3m $120.1m $363.4m $186.5m $147.5m $142.1m $125.3m

Total transacted land area 2,625 ha 552 ha 1,248 ha 2,695 ha 4,232 ha 7,594 ha 4,199 ha 3,229 ha 3,108 ha 2,860 ha

Market value /ha $41,963 $31,159 $41,349 $44,573 $46,418 $47,852 $44,415 $45,640 $45,714 $43,788

SOUTHLAND 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18


Total value of transacted land $132.3m $151.1m $237.2m $164.7m $179.2m $249.4m $192.2m $71.5 m $92.3m $107.1m

Total transacted land area 3,957 ha 4,462 ha 7,983 ha 5,035 ha 5,321 ha 6,722 ha 4,902 ha 2,198 ha 3,625 ha 3,700 ha

Market value /ha $33,423 $33,859 $29,709 $32,704 $33,680 $37,101 $39,215 $32,512 $25,462 $28,946

WAIKATO 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18


Total value of transacted land $250m $180.1m $78.8m $172m $250m $313.7m $362.1m $264m $325.4m $197.6m


Market value /ha $44,425 $32,168 $34,731 $32,445 $27,582 $39,828 $43,757 $38,532 $45,325 $39,590

TARANAKI 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18


Total value of transacted land $101m $44.3m $98m $64m $73.3m $189.6m $149.7m $130m $142.2m $100.1m


Market value /ha $33,423 $33,859 $29,709 $32,704 $33,680 $37,101 $39,215 $32,512 $25,462 $29,027

Source: REINZ, Colliers International

TOTAL VALUE OF DAIRY FARM SALES PER REGION 2008-2018

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TOTAL VALUE OF DAIRY FARM SALES PER REGION

Canterbury Southland Waikato Taranaki

TOTAL NUMBER OF DAIRY FARM SALES PER REGION 2008-2018

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Canterbury Southland Waikato Taranaki

AVERAGE NET SALE PRICE PER HECTARE PER REGION 2008-2018

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$10,000.00

$20,000.00

$30,000.00

$40,000.00

$50,000.00

$60,000.00

Canterbury Southland Waikato TaranakiData source: Colliers International Rural Valuation. REINZ

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United States 4%

China

29%

THE REST OF THE WORLD 16%

Mexico2%

Vietnam 2%

Philippines 4%

Singapore 3%

South Korea 2%

Japan 4%

Taiwan 3%

Malaysia 4%

Australia 7%

Saudi Arabia 3%

Sri Lanka 2%

Bangladesh 3%

Thailand 2%

Indonesia 2%

Egypt 2%

Algeria 2%

UAE 4%

Hong Kong 1%

Top 20 dairy export destinations for New Zealand

Data source: Colliers International Rural Valuation. Statistics NZ

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2018

Past 18 months in review

April 2017 May 2017 June 2017 July 2017

Fonterra Opening Forecast $6.50 per kgMS payout for 2017/2018 season

Mycoplasma Bovis Found in New Zealand cows near Oamaru

↔ OCR reviewNo change. Last movement was November 2016 down -0.25% to 1.75%

↔ OCR reviewNo change - 1.75%

↑ NZD/USD exchange rateHighest point for the year 2017 on 27 July at $0.7538

↑ GDT IndexAt 987 the Index is up 53% on April 2016

↑ Whole Milk PowderHighest auction price for 2017 on 16 May $3,321 per tonne

↑ GDT IndexHighest value for 2017 at 1,096

Fonterra Forecast Update $6.75 per kgMS payout for 2017/2018 season

$14,950,000 The highest Net Sale Price in Canterbury for 2018 so far for the same property

$53,958/ha The highest dairy NSP/ha in Canterbury for 2018 so far 450 Barnswood Road


↑ NZD/USD exchange rateHighest point for the year 2018 on 19 February at $0.7397


April 2018 May 2018

Fonterra $7.00 per kgMS - Fonterra Opening Forecast for payout for 2018/2019 season

↓ Jobless rateLowest level in 9 years at 4.4% with labour force participation rate sitting at 70.8%

↑ Whole Milk PowderHighest auction price for 2018 so far at $3,311 per tonne

↑ GDT IndexHighest value for 2018 so far at 1,065

↓ Consumer Price IndexDecreased to +1.10% year-on-year in the March quarter

January 2018 February 2018 March 2018


M.Bovis Erradication Government announces plans to eradicate the disease in New Zealand on 28 May 2017

$57,518/ha The highest dairy NSP/ha in Canterbury for 2017 1847 Thompsons Track, Chertsey

August 2017 September 2017


General electionsWinston Peters emerges as the decision maker


Fonterra Final Payout numbers - $6.12 per kgMS for 2016/2017 season

Dividend - 40 cents per share. Result is up 52% on 2016/2017

October 2017 November 2017 December 2017

New Government New coalition Government announced between Labour, New Zealand First and the Green Party

OIO changes criteria Overseas Investment Office tightens restrictions on overseas buyers

$15,300,000 The highest Net Sale Price in Canterbury for 2017 803 Ardlui Road, Malvern (unconditional agreement date was 23 December 2016)

↓ Whole Milk PowderLowest auction price for 2017 on 19 December at $2,755 per tonne


↓ NZD/USD exchange rateLowers point for the 2017 year on 20 November at $0.6806

Mycoplasma Bovis was first detected in the North Island, Hawke’s Bay

↓ GDT IndexLowest value for 2017 at 935

June 2018 July 2018 August 2018 September 2018

↓ NZD/USD exchange rateLowest point for the 2018 year on 5 October at $0.6440

↑ Consumer Price IndexIncreased slightly to +1.50% year-on-year in June quarter

Fonterra Final cash payout price $6.69 per kgMS for 2017/2018 season plus dividend of 10 cents per share.

Milk sale volumes ↓ 3% on last season.

↓ Whole Milk PowderLowest auction price for 2018 so far at $2,753 per tonne

↓ GDT IndexLowest value for 2018 so far at 898




October 2018

Plans to improve water quality Government proposes changes to Resource Management Act to implement tighter water quality standards.

Fonterra 2018/19 Forecast Updated to $6.75 per kgMS

Fonterra Revised its payout forcast to $6.25-$6.50

1110




The Canterbury dairy market ended the 2017/18 season having seen a total of 15 dairy farms sell for $125 million. This compares to the $126.9 million for the 16 farms sold to New Zealand purchasers in the 2016/17 season and the $129.1 million for the 14 farms sold to New Zealand purchasers in the 2015/16 season.

The removal of international purchasers from the Canterbury dairy farm market is having an impact though as a number of properties which would have previously sold to international purchasers, failed to sell throughout the 2017/18 year and are currently being relisted. A number of these relisted properties are situated in 2nd or 3rd tier localities or are of a larger scale which offer the appeal of a greater return albeit with an increased climatic, contour, irrigation or development risk.

Market sentiment appears subdued, the limited liquidity, the threat of Mycoplasma Bovis, the risk of further environmental regulations and the performance of Fonterra appear to be starting to take their toll on both vendors and purchasers alike.

The strength of neighbouring farmer’s balance sheets is apparent in some of the transactions. Farms within strong Mid Canterbury localities are likely to continue to

sell well, whereas farms in more fringe areas are likely to require a longer marketing period and vendors may have to reduce their pricing expectations in order to achieve a sale. In many cases we understand that there is some pressure from financiers for these properties to be sold and debt repaid after the recent dairy downturn. It is anticipated that due to the smaller pool of buyers the value gap between higher quality and poorer quality properties is likely to widen further.

The Canterbury Land and Water Regional Plan has the potential to limit milksolid production on most farms throughout the region. Nitrogen loss rates on Canterbury dairy farms are largely dependent on the stocking rate, soil type and method of irrigation employed on farm. Those properties which have typically had very high levels of milksolid production per hectare have imported a significant portion of supplementary feed onto the property. As dairy farmers are assessed against the Environment Canterbury Good Management Practice benchmark, we anticipate that the dairy farm market will mature and place greater emphasis on the true drivers on sustainable long-term production; those being soil type, secure low-cost irrigation water and quality of irrigation and farm infrastructure.

Market activity

ADDRESS LOCALITYAGREEMENT DATE

SALE PRICE AREA NSP/HANSP/

kgMS

AVE EFF kgMS/HA

CAPITAL

ORIGIN

868 Boundary Creek Road Dunsandel April 2018 $3,820,000 82.50 ha $46,303 $32.75 1,532 Domestic

340 Dixon Road Eyrewell Forest April 2018 $11,800,000 277.82 ha $42,474 $29.23 1,583 Domestic

694 Timaru Track Road Maronan April 2018 $11,500,000 225.70 ha $50,953 $34.78 1,560 Domestic

450 Barnswood Road Lismore April 2018 $14,495,000 268.64 ha $53,958 $34.68 1,620 Domestic

403 South Eyre Road Eyrewell March 2018 $8,650,000 190,13 ha $45,496 $30.38 1,539 Domestic

293 Ollivers Road Greenstreet Feb 2018 $5,800,000 108.95 ha $53,235 $35.55 1,539 Domestic

245 Bleak House Road Kirwee Dec 2017 $5,530,000 108.33 ha $51,050 $35.74 1,502 Domestic

1847 Thompsons Track Chertsey Dec 2017 $8,560,000 148.82 ha $57,518 $37.35 1,556 Domestic

101 Arundel Belfield Road Belfield Dec 2017 $7,000,000 139.96 ha $50,014 $34.10 1,551 Domestic

1742 Mainwarings Road Dorie Dec 2017 $8,260,000 144.96 ha $56,983 $40.69 1,450 Domestic

282 Braemar Lauriston Road Lauriston Dec 2017 $8,808,000 169.85 ha $51,858 $35.44 1,563 Domestic

12/763 Main Rakaia Road Selwyn-Rakaia Dec 2017 $11,110,000 202.18 ha $54,950 $39.51 1,553 Domestic

136 Mt Palm Road Rotherham Nov 2017 $6,640,000 125.99 ha $52,703 $35.74 1,523 Domestic

46 Mitchells Road Selwyn-Rakaia Nov 2017 $12,750,375 231.83 ha $55,000 $36.80 1,575 Domestic

1031 Sharlands Road Bankside Oct 2017 $11,638,500 242.46 ha $48,001 $33.06 1,498 Domestic

1375 Ashburton Staveley Road Ashburton Forks Oct 2017 $3,050,000 57.58 ha $52,966 $35.81 1,589 Domestic

Key Canterbury sales in the past 12 months

340 Dixon RoadApril 2018 277.82 ha A 277.80 hectare centre pivot irrigated dairy farm located 13

kilometres south of Oxford, situated on the southern side of Dixon Road.

The general contour is flat and lies at an altitude of 225 metres above sea level with Lismore silty loam soils.

Production over the past five seasons is around 417,500 kgMS milking 906 cows with 582 kgDM/cow of PKE and less than 50 kgDM/cow of silage. Irrigation water is provided from Waimakariri Irrigation Limited (WIL) with the property holding 1,939 shares allowing for a water take of 145 litres/second.

The nutrient discharge for the property using OVERSEER version 6.2.3 shows an N-Loss to water of 95kg/ha/yr. Improvements include a 60 bail rotary dairy shed, three dwellings and several farm support buildings. We understand some capital expenditure is required to upgrade farm infrastructure and the purchaser allowed for this when negotiating the purchase price.

NSP $11,800,000

NSP/ha $42,474

NSP/kgMS $29,23

1,583 kgMS

Major Transactions

Data source: Colliers International Rural Valuation

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450 Barnswood RoadApril 2018 268.64 ha ‘Barnswood’ is a 268.6353 hectare irrigated dairy unit located

11 kilometres south of Mayfield, situated on the southern side of Barnswood Road and boarded by Boltons Road to the west.

Infrastructure includes a 54-bail rotary dairy shed milking 909 cows and producing an average of 452,872 kgMS over the past two seasons.

Other improvements include five dwellings and several farm support buildings. Irrigation water is supplied from the Mayfield Hinds Valetta irrigation scheme (11,038 shares) plus a ground water consent, along with on-farm storage which is applied via three centre pivots with the balance under rotorainer and k-line.

Soils - Lismore

NSP $14,495,000

NSP/ha $53,958

NSP/kgMS $34.68

1,620 kgMS

Major Transactions

694 Timaru Track RoadApril 2018 225.70 ha A 225.6998 hectare irrigated dairy unit located 16 kilometres

northwest of Ashburton, situated on the western side of the junction of Timaru Track Road and Simpsons Road.

Improvements include a 60-bail rotary dairy shed with in-shed feeding and pro track, plus a 500 cow yard, four dwellings, two irrigation water storage ponds and other farm support buildings.

Irrigation water is supplied by Mayfiled Hinds Valetta irrigation and applied via three centre pivots, rotorainer and k-line over well drained Lismore soils.

Historically this property has been run in conjunction with an adjoining lease block with production averaging 444,000 kgMS milking 880 cows from a 244-hectare dairy platform.

NSP $11,500,000

NSP/ha $50,953

NSP/kgMS $34.78

1,560 kgMS

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colliers.co.nz/rural

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CANTERBURY KEY DAIRY FARM SALES OCTOBER 2018

COLLIERS INTERNATIONAL RURAL MARKET DATA SERIES

450 BARNSWOOD ROAD LISMOREApril ‘18 $14,495,000

ha 268.64 ha

$/ha $53,958

LV/ha $42,989

$/kgMS $34.68

1,620 kgMS/ha

4.41%

1847 THOMPSONS ROAD CHERTSEYDec ‘17 $8,560,000

ha 148.82 ha

$/ha $57,518

LV/ha $39,513

$/kgMS $37.35

1,556 kgMS/ha

3.66%

101 AROUNDEL BELFIELD ROAD, BELFIELDDec‘17 $7,000,000

ha 139.96 ha

$/ha $50,014

LV/ha $39,728

$/kgMS $34.10

1,551 kgMS/ha

4.54%

282 BRAEMAR LAURISTON ROAD, LAURISTONDec ‘17 $8,808,000

ha 169.85 ha

$/ha $51,858

LV/ha $43,019

$/kgMS $35.44

1,563 kgMS/ha

4.13%

868 BOUNDARY CREEK RD DUNSANDELApril ‘18 $3,820,000

ha 82.5 ha

$/ha $46,303

LV/ha $30,812

$/kgMS $32.75

1,532 kgMS/ha

3.91%

340 DIXON ROAD EYREWELL FORESTApril ‘18 $11,800,000

ha 277.82 ha

$/ha $42,474

LV/ha $35,773

$/kgMS $29.23

1,583 kgMS/ha

4.91%

694 TIMARU ROAD MARONANApril ‘18 $11,500,000

ha 225.7 ha

$/ha $50,953

LV/ha $38,021

$/kgMS $34.78

1,560 kgMS/ha

4.29%

293 OLLIVERS ROAD GREENSTREETFeb ‘18 $5,800,000

ha 108.95 ha

$/ha $53,235

LV/ha $39,711

$/kgMS $35.55

1,539 kgMS/ha

4.38%

1403 SOUTH EYRE ROAD SWANNANOAMarch ‘18 $8,650,000

ha 190.13 ha

$/ha $45,496

LV/ha $36,730

$/kgMS $30.38

1,539 kgMS/ha

5.01%

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$/haNet sale price per hectare

LV/haEffective land value per hectare

$/kgMSNet sale price per kilogram milk solidsAverage Efficient kgMS

Yield (OPMD / GCSP)

12/763 MAIN RAKAIA RD SOUTHBRIDGEDec ‘17 $11,110,000

ha 202.18 ha

$/ha $54,950

LV/ha $44,354

$/kgMS $39.51

1,553 kgMS/ha

3.91%

245 BLEAK HOUSE ROAD KIRWEEDec ‘17 $5,530,000

ha 108.33 ha

$/ha $51,050

LV/ha $34,413

$/kgMS $35.74

1,502 kgMS/ha

3.33%

1742 MAINWARNINGS RD DORIEDec ‘17 $8,260,000

ha 144.96 ha

$/ha $56,983

LV/ha $40,000

$/kgMS $40.69

1,450 kgMS/ha

3.91%

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http://colliers.co.nz/rural

http://colliers.co.nz




Amuri Irrigation Scheme

$35,000-$40,350 LV/ha

Central Plains Water Irrigation Scheme

$31,500-$38,000 LV/ha

Mayfield Hinds Valetta Scheme

$36,750-$44,250 LV/ha

Ashburton Lyndhurst Irrigation Scheme

$40,000-$44,000 LV/ha

Rangitata South Irrigation Scheme

$32,000-$38,000 LV/ha

Barhill Chertsey Irrigation Scheme

$34,000-$38,500 LV/ha

Waimakariri Irrigation Scheme

$30,000-$37,000 LV/ha

IRRIGATION SOURCE DRYLAND K-LINE & ROTORAINER CENTRE PIVOT

No Irrigation $17,500 - $27,500/ha

Surface & Shallow Ground Water $29,000 - $40,500 LV/ha $33,500 - $45,000 LV/ha

Moderate to Deep Groundwater $36,750 - $40,000 LV/ha $40,500/ha - $45,750 LV/ha

Waimakariri Irrigation $30,000 – $36,000 LV/ha $37,000 LV/ha

Amuri Irrigation $35,500 - $36,000 LV/ha $39,900 - $40,350 LV/ha

Central Plains Water Irrigation $31,500 - $36,750 LV/ha $35,500 - $38,000 LV/ha

Mayfield Hinds Valetta $36,750 - $40,000 LV/ha $40,500 - $44,250 LV/ha

Ashburton Lyndhurst $40,000/ha $40,750 - $44,000 LV/ha

Rangitata South Irrigation $32,000 - 34,000 LV/ha $35,000 - $38,000 LV/ha

Barhill Chertsey Irrigation $34,000 - $36,000 LV/ha $36,000 - $38,500 LV/ha

When considering the value of dairy farm land, the biggest determinant is the quality of the underlying physical resources - the location, soils, nutrient limitations and irrigation water availability.

Improvements such as buildings and fencing have a finite economic life and can be changed to suit with time and capital, however the underlying physical characteristics of the land are essentially fixed.

Where land benefits from the use of irrigation water, it may be sourced from consented groundwater, a surface water take or from an irrigation scheme. Not all water resources are the same, so it is important that the volume, reliability, cost and infrastructure are all considered when assessing the value of irrigation to the land. Valuation of rural land requires careful consideration to ensure that the property receives the right amount of irrigation water when the farm needs it, at a reasonable cost and that the infrastructure is in place to ensure the most efficient use of the water.

When the Canterbury dairy market was approaching its peak in 2014 and 2015, competition between potential purchasers led to an under-pricing of irrigation cost and reliability. In more recent years due to the slowing market we are seeing that those potential purchasers

still active in the market can afford to take a more discerning view with reduced risk of missing out to a less informed purchaser.

All other things remaining equal, we would anticipate that dairy farm land receiving water from those irrigation schemes providing the lowest cost water at the best reliability would be more sought after in the market compared to farms receiving higher cost water or at a lower level of reliability.

Once the water arrives at the property, the irrigation type is becoming increasingly important. Not only do modern pivots grow more grass leading to more milk in the vat, they also have a lighter environmental footprint compared to rotorainer or gun irrigation and are less labour intensive.

We consider that the market is now starting to show a preference for farms receiving water from an irrigation scheme who holds the nutrient discharge consent compared to a farm sourcing irrigation water from ground or surface takes with an individual consent, together with the requirement for a separate consent to farm.

Irrigation

Data source: Colliers International Rural Valuation

1918

The 2017/18 season started with an opening Fonterra farmgate milksolid forecast of $6.50 kgMS announced on 24 May 2017, this was quickly revised up to $6.75 kgMS on 27 July 2017, before dropping on 7 December to $6.40 kgMS. The final payout for the 2017/18 season was confirmed at $6.69 on 13 September 2018. Although the farmgate milksolid price remained firm, the dividend of 10 cents per kilogram of milksolids was below expectations. The key theme for the year was that of balance sheet recovery being the second successive season with a farmgate milksolid payout above the historical average of $6 kgMS and a significant increase from the $4.40 and $3.90 payment received in 2014/15 and 2015/16 which for most farmers was below the cost of production and debt servicing.

In Canterbury, dairy farmers have the choice of up to four suppliers, Synlait announced a final year payout for the 2017/18 season of $6.78, being the fourth successive season of delivering a farmgate price on excess of Fonterra. Westland announced

a disappointing $6.12 payment after a challenging year and Oceania posted a payment of $6.84 kgMS continuing their policy of paying the Fonterra price plus 10 to 15 cents.

The outlook for the 2018/19 season is for continued strong payouts above the historical average. Fonterra are forecasting a farmgate milkprice between $6.25 - $6.50 kgMS, Synlait, $7.00 kgMS, Westland $6.50 to $6.90 kgMS and Oceania $6.90 kgMS.

The 10-year rolling average of the Fonterra farmgate milksolid price is $5.99 kgMS, with the 5-year average of $5.90 kgMS. Once the forecast year is taken also into account the 10-year rolling average increases to $6.19 kgMS and the 5 year average drops to $5.57 kgMS.

The decision to purchase a dairy farm property is a significant financial commitment and requires consideration of milk prices beyond the immediate season. For the purposes of our productive valuation approach we are currently adopting a longer-term steady state milk price of $6.25 kgMS.

Farmgate Milksolid Payout

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

$9.00

FORECAST FONTERRA PAYOUTFonterra Payout Dividend 5yr rolling average 10 yr rolling average

Data source: Colliers International Rural Valuation, Fonterra

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International InvestmentNUMBER OF DAIRY FARM SALES: DOMESTIC VS. INTERNATIONAL CAPITAL

TOTAL VALUE OF DAIRY FARM SALES: DOMESTIC VS. INTERNATIONAL CAPITAL

There are two sources of foreign capital in the Canterbury dairy market. Debt financing funded by overseas money and foreign direct investment in farmland.

The milksolid price shock in the 2014/15 and 2015/16 seasons came hard on the heals of an $8.40 kgMS price for the previous 2013/14 season. Both the Reserve Bank of New Zealand and the Australian Prudential Regulation Authority realised that dairy farm debt placed the economy and the banks at risk and therefore sought to tighten some lending policies and strengthen farm balance sheets against the future risk of milksolid price shocks.

We are aware that most banks now require both interest and principal to be repaid, whereas previously most dairy farm loans were made on an interest only basis. The principal repayments are now also being repatriated back to Australia rather than being available to fund other dairy farm transactions.

The continued low interest rates have been a positive influence on the market, however we consider that the principal repayment requirement introduces a higher threshold of profitability required in order for a potential purchase to be approved by the bank. Any increase in credit criteria is likely to reduce demand and mount pressure on asking prices.

Foreign investment in New Zealand agriculture was viewed more favourably by the previous Government. This was a new source of introduced capital which

often had a trickle-down effect of lubricating the rural property market, with several downstream transactions changing hands as a result of money flowing in from overseas.

Since the September 2017 General Election, and the November 2017 Ministerial Directive letter we are not aware of any new dairy farm sales having gained Overseas Investment Office approval. In the accompanying graph foreign investment in the 2017/18 season compares in direct contrast to the 2013/14 season where foreign direct investment totalled $171 million and accounted for 39% of the market activity by quantum and 35% by number of sales. The graph also illustrates that the total transaction value with New Zealand domiciled purchasers has been relatively steady since the 2014/15 season within a range of $150 to $125 million per annum. The greatest impact on the market is the removal of the international purchasers.

We consider that the effect of reduced international capital will be hardest felt by larger scale properties above $10 million and beyond the reach of the buying power of most New Zealand based market participants. Vendors of these larger scale properties may need to consider subdivision or reducing their asking prices.

We are aware that some larger scale corporate dairy farmers are considering selling a minority interest of less than 25% as a way of introducing foreign capital without the requirement of Overseas Investment Office approval.

Data source: Colliers International Rural Valuation, OIO

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CANTERBURY DAIRY FARM NOMINAL INDEX: Dec 2010 - Current

Canterbury Dairy Market Value Index Indexed Sales

Source: Colliers International

Canterbury Model Farm Dairy Index

Canterbury Model Dairy FarmTotal land area

186 ha Colliers International Rural & Agribusiness valuation division has developed a Dairy Farm Index for Canterbury to measure the nominal market value movements of a representative Canterbury dairy property. The graph follows the market fluctuations since June 2010.

Our representative Canterbury dairy farm is based upon a total area of 186 hectares with an effective irrigated dairy platform of 173 hectares. The property has centre pivot spray irrigation sourced from reliable groundwater at a moderate depth. Infrastructure includes all necessary buildings required to operate - three modern staff dwellings, a good 40-aside herringbone dairy shed and a calf shed.

The representative farm is assessed to produce approximately 1,400 kgMS per hectare under average efficient management. Average efficient concept is used to assess a property on the level of production that a competent efficient manager can produce off the land using standardised levels of inputs. This allows a comparison between properties on the basis of their physical resources rather than the skill of their current management.

Centre pivot spray irrigation

Reliable groundwater at a moderate depth

A good 40-aside herringbone dairy

shed

A calf shed

Three modern staff dwellings,

1,400 kgMS

The Colliers Canterbury dairy farm index shown in yellow tracks the movement in value per hectare of a representative Canterbury dairy farm over time, indexed back to December 2010. The actual sales evidence is also indexed back to December 2010 in a similar manner as shown by the blue dots. This provides a visual illustration of both the volume of sales and the relativity of sales over time. This is evidenced by the cluster of sales in the range of high $50,000 to low $60,000 band which occurred in late 2013 which coincided with the market peak. The graph also shows the range of sale prices within the same period of time, outliers could either be lower quality farms or farms with a larger extent of ineffective land.

The Colliers Canterbury dairy farm index illustrates that dairy farm prices increased rapidly throughout 2012 and 2014 on the back of strong farmgate milksolid payouts and the influx of international capital. The market reached its peak in early 2014 and then plateaued throughout 2015 before correcting in late 2015 and early 2016 as a direct result of the 2014/15 and 2015/16 payout shock.

The index illustrates that the market for Canterbury dairy farms then experienced another period of relative calm through mid to late 2016 before gradually regaining some lost momentum throughout 2017. We consider that since the surprise election of the Labour, New Zealand First and Green coalition government that the market is once again subdued, and prices are now once again softening.

Typically, the June to September quarter is usually a very quiet period for dairy farm sales as farmers are busy leading into calving and often listings are pulled from the market until mid-spring. As a result, we have seen little new sales evidence, although now that we are in spring, we should see sales occurring and early signs of the direction the market will take into the 2018/19 season.

We have also considered the implied market yield of our model farm over time. To assess the implied pre-tax yield, we have assessed the Cash Operating Surplus (COS), by assessing gross farm income less farm working expenses for the representative farm under average efficient management. We have then deducted an allowance for depreciation on buildings and deducted wages of management to calculate the Operating Profit after Management and Depreciation (OPMD). We have added an estimated value of livestock, plant and machinery to assess the Going Concern Value. By dividing the OPMD by the Going Concern Value we can ascertained the implied pre-tax yield.

Our yield analysis illustrates that for our representative Canterbury dairy farm the yield was at its lowest point throughout 2014 and early 2015. This is a function of reduced expectations of the future dairy payout and the high market prices for dairy farms. As the farmgate milksolid price improved and dairy farm values softened our implied yield has also increased as expected. The future direction of the yield analysis indicates that dairy prices are likely to continue to soften.

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Yeild NSP/ha Index

CANTERBURY MODEL DAIRY FARM INDEX AND IMPLIED PRE-TAX YIELD 2010 - CURRENT

Data source: Colliers International Rural ValuationYield

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We consider that the market outlook for Canterbury dairy farms is likely to see continued softening of values. The market for Canterbury dairy farms appears to have now become constrained by limited liquidity together with a reluctance by existing farmers to increase risk after recent poor dairy payouts. The absence of foreign direct investment has also reduced competition among buyers and also further reduced market liquidity.

Credit which was extended to dairy farmers is now being required to be repaid together with principal term loan repayments. The risk of increasing interest rates is also still lurking on the horizon as it has for the last couple of seasons.

It appears as though buyers are not particularly motivated to purchase, there is no compelling reason to act now rather than in 12 months’ time. The fear of missing out in the face of rising asset prices has subsided.

We think there is a pervading view that if the market thinks prices will ease, then purchasers will hold off until those vendors needing to sell are compelled to accept a lower price and then other vendors may also gain the confidence to sell at a new lower level.

The first tranche of environmental restrictions are starting to take effect. Whilst most farmers should easily achieve the required reductions with some quick wins from low hanging fruit, the next level of reductions will involve more pain, either investment

in new technology or further tweaks to the farming system involving reduced stocking rates, fertiliser.

The Waimakariri subregional plan has been delayed and is due for publication shortly. There is the risk that this plan may include nutrient reductions beyond market expectations and negatively impact on values.

Dairy farms situated in higher cost irrigation schemes or those with short dated ground or surface water consents may also struggle to sell in the current market where the reduced number of buyers have a greater choice of options.

Mycoplasma bovis is impacting on farmer sentiment, the results of early season bulk milk testing will provide an early gauge on the extent of the disease incursion and the likely success of eradication.

As the dairy payout has strengthened in the last two years, together with softening prices, yields have improved. This is a reflection of the increased risk and is a function of easing property prices and improved milksolid pricing. We anticipate that this trend will continue into the foreseeable future. Yields will continue to increase as purchasers require a greater return on capital to reflect the increased risk of farming. This will lead to softening prices.

For these reasons we anticipate that Canterbury dairy farm prices will soften throughout the 2018/19 season.

Future Outlook

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About the author

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Greg PetersenDirector

+64 21 991 348 [email protected]

Greg specialises in the valuation of rural property throughout Canterbury and the South Island. His work has included financial reporting valuations for large-scale rural portfolios compensation assessments, intensive farming systems for major infrastructure projects, Crown Pastoral Land tenure review assessments and one off individual farm valuations for lending, estate and development purposes.

Greg offers our clients excellent technical skills and he has a highly developed understanding of the public sector and relevant legislation. He has had 15 years of valuation and property consultancy experience and has been based in the Christchurch office since joining the team in 2011. Prior to joining Crighton Anderson, now Colliers International Rural and Agribusiness, he worked for both the Office of Treaty Settlements and Quotable Value.

Greg plays a lead role in our corporate dairy farm valuation work, high country, infrastructure compensation, intensive farming operations and in other valuation practice areas.

Greg produces the Canterbury Dairy Farm Index and sales maps. He also has presented at industry events and published technical articles.

Also contributed to the report

Ryan BrattyAssociate Director


Kate DayValuer


Jack PowellRegistered Valuer


Christchurch

Auckland

Nelson

Tauranga

Blenheim

South Canterbury

3130

Blue HancockDirector


Chris BoydDirector


John DunckleyDirector


Praveen MenonAssociate Director


Kate DayValuer


Jack PowellRegistered Valuer


Tim CrightonExecutive Director


Ryan BrattyAssociate Director


Michelle WardAssociate Director

+64 27432 9015 [email protected]

Ed PercyDirector


Greg PetersenDirector


Rachel WellsAnalyst & Systems Manager


Tim GiffordDirector


Tim BanksAssociate Director

+64 21199 4599 [email protected]

Jo BainOffice manager


Karen O’DonovanFinancial Administrator


Denitsa Stoeva Marketing & Communications

+64 1 025 69 472 [email protected]

mailto:tim.banks%40colliers.com?subject=

Accelerating success.

Disclaimer The opinions, estimates and information given herein or otherwise in relation hereto are made by Colliers International and affiliated companies in their best judgement, in good faith and as far as possible based on data or sources which are believed to be reliable. The material contained herein is not intended to substitute for obtaining individual advice from Colliers International or another advisor able to provide the services of a qualified professional person. Colliers International, its officers, employees and agents expressly disclaim any liability and responsibility to any person whether a reader of this publication or not in respect of anything and of the consequences of anything done or omitted to be done by any such person in reliance whether wholly or partially upon the whole or any part of the contents of this publication.

RURAL & AGRIBUSINESSVALUATION & ADVISORY SERVICES

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