Home > News > Archive > 19th June 2007

Dairy payout could hit $6 next year says AGRI Fund

Courtesy of Te Awamutu Courier

Strong commodity prices could see the dairy payout hit $6 per kilogram of milk solids in 2008. AGRI Private Capital Fund (AGRI Fund) director Andrew Watters said Fonterra’s announcement last month of a 27% increase in its 2007-2008 payout to $5.53 per kilogram reflects a growing demand for agriculture products worldwide.

The recently announced increased dairy payout is expected to deliver more than $1.5 billion to dairy farmers, or approximately $3.75 billion into the rural economy.

“Rapid population growth, a rising middle class in Asia wanting high protein Western diets and increased bio-fuel production is expected to drive commodity prices higher in the next decade.”

Speaking at the agricultural Fieldays at Mystery Creek, Mr Watters said these trends were expected to create even more demand for New Zealand’s agricultural produce.

“In China, revenues from sales of milk beverages, cheese and desserts, and yoghurt are expected to grow annually by 22%, 38% and 31% respectively over the next three years.”

Global milk consumption is currently increasing by around 3%, roughly New Zealand’s entire production, every year and New Zealand’s share of the international dairy market continues to grow with milk-based products now making up almost a third of commodity exports by value.

“The United States is the world’s largest exporter of milk powder,” Mr Watters said. “But grains are used to feed dairy herds and increased ethanol production means that large tracts of current arable land are being used to grow bio-mass for fuel, not for food. This has resulted in grain feed costs rising so sharply that expanding milk production in the United States is not profitable, even at existing prices. This is driving not just dairy prices but the price of other primary food sources, which is a very positive signal to investors in the New Zealand agriculture sector.”

Mr Watters said price adjustments were expected to continue in the next decade as interest grows in renewable sources of energy to lessen the dependence on foreign oil. BT equities and property portfolio manager Paul Richardson shares Andrew Watters confidence.

“We are looking at the agricultural sector being responsible for driving higher standards of living across New Zealand, which is something that has not been talked about until now. Long gone are the days when agriculture was referred to as the old economy. Agriculture, and the businesses that service the agriculture sector, are going to be in a box position in the next decade, and we look forward to being a part of that.”

AGRI Fund was launched last month by rural syndicate specialist Agricultural Investments Limited (AGInvest) and fund manager BT Funds Management. Mr Watters is also a director of AGInvest. AGRI Fund is seeking to raise more than $60 million to invest in a portfolio of quality New Zealand farms and agri-businesses, and intends on investing 50% of the funds into high potential pastoral farms and ordinarily 50% in attractive agri-businesses.

An article in the Courier earlier this month outlined the likely positive spin-offs to the local economy from Fonterra’s predicted 2007-08 payout of $5.53 per kg of milk solids. For rural service towns like Te Awamutu the impact of the dairy payout is significant.