Australia’s dairy industry is catching the eye of investors who favour alternative assets with highly supportive supply/demand fundamentals and the potential to capture income and capital growth.
This is the view of Elizabeth Blackhurst and James Everist, Directors of the Prime Value Dairy Trusts.
Blackhurst and Everist say the Australian dairy industry’s supply and demand fundamentals are “exceptionally supportive”. Australia’s national milk production has fallen from approximately 11 billion litres to 8 billion litres over the past 20 years, which means Australia now needs 70-75% of its national milk production just to meet domestic consumption. Australia was previously exporting more than 50% of its dairy products.
These changes in the industry are significant and underpin domestic milk prices, according to Elizabeth Blackhurst.
“The Australian dairy industry is in a much stronger position than it was five years ago. This is due to the lower supply, the end of the supermarkets’ discount milk policy, and the introduction of the Dairy Code of Conduct which governs how processors deal with farmers.
“It is worth noting that much of the current public concern and the recently announced ACCC inquiry into supermarket pricing took place in the dairy industry a number of years ago, delivering a much better outcome for dairy farmers.”
Industry fundamentals combined with a global backdrop of food and water scarcity, and increasing demand from a rising Asian middle class, led Prime Value Asset Management to create its portfolio of world class dairy assets in North West Tasmania and South West Victoria.
The Prime Value Dairy Trusts are not just about milk production, they are also about premium farmland and water.
James Everist says ownership of farmland is a key reason why dairy is attractive as an investment. “Our investment in dairy is about generating regular income from milk sales, but we also specifically want the exposure to the capital growth potential of farmland.”
Despite the rainfall associated with La Nina in Australia over the past three years, the Prime Value team knows drought and water scarcity are always concerns for investors in agriculture. To mitigate these climate risks, they have specifically targeted areas of high rainfall and have been buying and consolidating farmland and strategically acquiring water rights in areas which would rank as some of the most water secure, productive pasture-based dairy locations in the world.
“Farmland of this calibre with abundant water is highly limited, and we believe this will underpin the long term capital growth of the investment.
“Investors may have noticed in 2022-2023 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.
“This demonstrates the strategic nature of investing in farmland, to provide valuable diversification and returns to portfolios.
“The combination of income and capital growth is a key reason why alternative investments such as dairy are so compelling for investors.”
Mr Everist says Prime Value prefers to own both the farmland and the operating business, a complementary combination which provides strong potential value-add for investors. “We believe it provides greater stability to the overall investment. This is why we offer this model to our investors, rather than a purchase and lease model which is more commonly offered to Wholesale investors in agriculture.
“We believe the own and lease model is much riskier because investors are exposed to the operational skills of the lessee to profitably run a farming business, and they are less aligned with beneficial longer-term decision making.
“The benefits of owning both the farmland and the operating business is shown by the large-scale redevelopment we have executed over the past three years, which is only possible when you own both the asset and the business”, Everist said.
Blackhurst and Everist say Prime Value’s dairy team has spent the last three years implementing best practice processes and turning rundown assets around.
“Prime Value has secured water rights for the farms at very reasonable rates. This is a long-term play to provide additional water security and value to the investment”, Ms Blackhurst said.
“The farms are now set up for the future”, Ms Blackhurst said. “The farms are operating at world class standards in terms of their care for the environment and animal health. The underlying fundamentals are strong and the assets are outstanding. It’s a very exciting time.”
The Prime Value Dairy Trusts aim to deliver superior total returns uncorrelated to traditional markets from a combination of regular income from milk sales and land value appreciation.
The Trusts target a minimum 12 per cent return over the medium-to-long-term, including distributions of 5-7 per cent paid quarterly.
The opportunity to invest in the Prime Value Dairy Trust is limited and is expected to close for further investment before the end of FY24. For more information please contact the Prime Value client services team at info@primevalue.com.au and 61 3 9098 8088.