Investors know property is well established as an alternative investment, but they may not appreciate the combination of capital gain and income which can be derived from a quality Australian dairy farm portfolio.
Returns from the Australian dairy industry are underpinned by supply and demand fundamentals which are exceptionally supportive.
Dairy farms behave similar to a traditional property investment, with regular cashflow distributions derived from dairy production, plus unrealised capital growth from the farmland itself.
To understand the dairy industry’s dynamics, consider Australia’s national milk production has fallen from approximately 11 billion litres to 8 billion litres over the past 20 years. Australia now needs 70 per cent of its national milk production just to meet domestic consumption. Australia was previously exporting more than 50 per cent of its dairy products yet is now less exposed to the export market.
However, increasing demand from a rising Asian middle class for dairy product, combined with a global backdrop of food and water scarcity, means there is some potential for an uptick in Australian dairy exports in the future.
The Australian dairy industry is now in a good place, with changes in the last five years hugely influential on creating favourable dynamics. In that time, we have seen lower supply and the end of the supermarkets’ discount milk policy. But perhaps most significant is the Dairy Code of Conduct.
The code came into effect on 1 January 2020 and governs how processors deal with farmers, enforced by the Australian Competition and Consumer Commission. It has created an environment of greater clarity, which includes a minimum dairy price, which is determined each year. All dairy trade must now comply with the code.
The Dairy Code of Conduct was overdue, has been effective, and been significant in providing more stability and confidence in dairy as an alternative investment.
The dairy outlook may be strong, but it is also fair to say you need to be investing in the right areas.
The “catch” with dairy is that much of the value is in the farmland and investors need to be selective because there is going to be a wide margin between the best and worst performers. A lot will come down to geography. Just like any real estate asset, the right location is critical.
Australia has some of the best dairy country in the world, but it is limited to key areas, including Tasmania (particularly north-west Tasmania) and south-western Victoria. These locations produce some of the best pasture-raised dairy products available anywhere because they have relatively consistently strong rainfall.
In fact, Tasmania has been the only state to have increased dairy production in recent years. It’s also worth remembering that quality counts – quality, pasture-raised dairy attracts premium prices from the major producers.
Long-term agricultural operators and investors never take rainfall for granted. We may have just had a wet period in Australia over the last few years due to La Niña, but drought and water scarcity are always major concerns for investors in agriculture.
To mitigate these climate risks, it’s important to specifically target areas of high rainfall. But location only gets you so far. Farms need to be managed to maximise their water security, which involves managing the farmland property and strategically acquiring water rights for those water secure, productive pasture-based dairy locations.
Farmland of this calibre with abundant water is highly limited and will underpin the long-term capital growth of the investment.
Investors may have noticed in 2022–23 that both the share market and residential property prices in Australia were challenged by the RBA raising interest rates, yet farmland continued to grow in value. Over the longer term, farmland returns have compared very favourably with the returns from other asset classes, without the same volatility.
The strategic nature of investing in farmland is to provide valuable diversification and returns to portfolios.
Dairy farming is particularly well placed to do this over the medium-to-long term, given a combination of attractive supply and demand dynamics, stronger regulatory oversight thanks to the dairy Code of Conduct, and a scarcity of quality dairy pasture farmland available.
Kirsti Keightley, general manager of Dairy Investment at Prime Value Asset Management