Thought I would drop you a quick line of my thoughts of New Zealand. Been mainly staying around Hamilton and Rotorua (Waikato district) and has been quite interesting. Firstly, how green and how wet it is (mainly 40 inches of rainfall in the Waikato, but can get up to 70 or more as you head west) and just how good these farmers are at growing grass. Soils are mainly volcanic ash, quite hydroponic, but when you get the rain they do every few weeks they can handle it OK. They have also had massive capital appreciation, with prices for top notch dairy country up to NZ$90,000/ha. Cows were also around NZ$2,000 each but both have come back. Apparently country used to be valued around NZ$18-20/kg Milk Solids, but was valued over NZ$50 up until recently. With the milk payout falling from mid NZ$7 to NZ$5 (some think mid NZ$4’s) there may yet be more downside to land prices, particularly given the gearing levels these dairy farmers have (sub 30% equity isn’t uncommon) and apparently there are some major players that are starting to feel the pinch. Land prices have apparently already come back around 15-20%, but there have been very few forced sales (yet?). The return on asset for these guys is also very low. One farm I saw (which was very well run) had an asset backing of NZ$20 million but their gross revenue was only approximately NZ$1.7m. It is a very common theme in NZ dairying it seems.

I met a gentlemen who is now out of his dairy (he has a farm manager now) but he milked 9,500 cows and his son has spent the previous 7 years in Brazil where there are a group of them developing a 5,500 ha dairy operation. Can grow 50t/ha grass there vs. a maximum of 25t/ha in NZ (subtropical grasses in Brazil and ryegrass in NZ). Seems this may be a common thread of the top NZ operators taking their skills and expertise in growing grass to cheaper and less developed countries.

Drystock (lamb and beef) farming has not come back to the same extent as dairy and lamb at the moment is bringing good money. Pasture management over here is exceptional and just reinforces my view (when I did my Icehouse program) that if I ever got into grazing I would want a kiwi to be my pasture manager. Their grass management just leaves us for dead in Australia.

The other interesting comment I heard is that the dairy farmers seem to be moving away from their competitive advantage which is low cost grazing and moving to more supplement feeding. A lot of comments I have heard feel that this path is not sustainable and that the dairy farmers, in following this course of action, are simply chasing production up the marginal cost curve and when the capital, labour and feed are priced in, they aren’t making any more money and in fact if the milk solid price falls below approximately NZ$6.50 (which it will this year) they are probably going to be losing money following this course of action.

Nitrogen leaching is an emerging issue and could severely curtail production in the future. They have been limited to 200 units of N (approx 500kg of urea/ha) in the future and this could come back further. Land use restrictions around Lake Taupo have been put in place by Environment Waikato and this could also become a problem in other parts of NZ where environmentally sensitive sites are located in a close proximity to dairy country. Everyone is also very sceptical of a carbon trading scheme, as it will effectively be a tax on production and could have a massive impact on NZ’s balance of payments if they don’t get it right.