Investing in NZ Dairying

Dairy Export Value By Destination
Value NZ$ 5.64 billion, year ended June 2003

Source: MAF

Why Invest in Dairying?

Investors participate in the New Zealand dairy industry for many reasons.

They want to invest in tangible assets. They are looking for a mix of returns from profitable business operation and from capital growth. Many investors have been very successful in creating wealth in the industry and Franklin Group has provided opportunities to its clients to generate very attractive returns from dairying in recent years.

The industry is our leading exporter and New Zealand dairy farmers have leading edge skills in grassland farming.

How to invest?

Large-scale dairy farming projects require significant capital. Typically equity investment of NZ$4 million to NZ$8 million is needed and is supported by additional debt capital of around NZ$3-6 million.

Bringing together groups of experienced investors in a company structure can achieve their mutual objectives.

We prefer a company structure with all business assets owned by the company, including land and buildings, livestock, dairy company share capital and plant and equipment. Having an equity shareholding farm manager is also the most likely way of aligning the objectives of all of the investors in the same direction. An equity manager is well motivated to maximise the returns of the business gaining a reward in the increasing value of the shares as well as from his salary remuneration.

Where is it best to invest?

The new expanding dairy areas in the South Island have been the most favoured locations for large-scale dairy farming projects. However suitable opportunities can arise in any dairying area in New Zealand given the combination of realistic asset prices, the right physical conditions of soil type and climate and potential for growth through increased productivity and/or acquisition of additional land.

We believe there will be attractive opportunities in Southland, Otago and Canterbury over the next year or two as well as in the major North Island dairy farming regions.

Who is involved in the projects?

Franklin Group specialises in setting up and supervising large-scale farming enterprises. Assembling investors, locating and purchasing properties, forming the corporate entities, obtaining finance, employing key staff and providing ongoing supervision are all services Franklin Group provides for the projects. Additional expertise is provided through the involvement of local consultants and industry specialists available through the Franklin Group network of associates.

We encourage the involvement of investors in setting the direction of their company and in observing the progress of the development and running of the farm.

Franklin Group’s role is in making projects happen for a single investor or for groups of investors including those interested in taking a position as equity holding farm managers.

What are the likely returns?

Our primary focus is on generating attractive operating profits expressed as a return on total equity capital invested. The key factors governing return on capital are: price of assets purchased, level of productivity achieved and efficient cost control in the business. As well as these factors which business managers have control over profitability is greatly influenced by the milk payout price received from the dairy company.

Discussion with investor clients enables us to establish return on investment expectations and to design projects to meet these expectations, including adopting a medium-term budget price for milk and what prices can be paid for assets.

Strong capital growth has occurred in the New Zealand dairy industry over the last 10 years. We believe that good operating profits must be the driver of capital growth and that it is likely that assets will increase in value on the basis of profitability. Some exceptional investment returns including both profits and capital growth have been achieved in the industry over the last five years.

There is presently an extremely good outlook for milk products globally which is reflected in the projected milk price announced by Fonterra for the coming season. The increased milk price will make a significant difference to farm profitability. We expect that this will lead to land prices increasing.

We are confident that attractive investment opportunities will continue to arise in the New Zealand industry and they will be based on productivity, judicious purchase of assets and efficient farming practices. In the medium-term we expect milk prices to rise somewhat and to support the above factors in generating attractive investor returns.

When will be the right time to invest?

Good opportunities come up all the time. We welcome contact at any time from experienced investors keen to be involved in dairying and appreciate the chance to understand their objectives. If you are contemplating investing NZ$100,000 to NZ$10 million in a professionally managed dairy investment we would be keen to talk with you.

The above information is provided as a guide for experienced investors contemplating investment in the New Zealand dairy industry. It should not be construed as offering securities to the public in terms of the Securities Act 1978.