West Coast: Cash flows following Yili purchase

BUSINESS WEST COAST

Frano Volckman, Karamea dairy farmer.

Cash flows following Yili purchase

Words and photos by: Anne Hardie

Ayear can make a big difference in dairying, especially on the West Coast where a lump sum for shares and a healthy payout has kickstarted the industry and lifted the mood among farmers.

When Chinese dairy giant Yili bought their flailing co-operative, farmers had gone through years of low payout, leaving little money to spend on debt and infrastructure. They lost their co-operative when they voted to sell Westland Milk Products to Yili, but it was an opportunity they couldn’t refuse. A generous share payout of $3.41 per share and a guarantee to match or better Fonterra’s payout for 10 years was a life saver for many.

Today, they have reduced debt, have money in their pockets and are spending on infrastructure that has needed upgrading for so long. Last year was a good first year under Yili ownership because the payout was so good.

Frano Volckman is a Karamea dairy farmer and chairs Westland’s supplier committee who says West Coast farmers are in a better financial position and have cash flow that has enabled them to simply enjoy farming again.

Like many West Coast dairy farmers, Frano and his wife, Kylie, used the share payout to pay off farm debt as volatile payouts from Westland over a number of years had led to banks wanting more security in the industry.

Psychologically, the Yili financial boost has had a huge positive effect on West Coast farmers and in general he says people are “pretty happy now”.

“Before, it was tough and frustrating – demoralising seeing farmers in other regions getting more. We had an underperforming dairy factory and a limited amount of light at the end of the tunnel and it became clearer and clearer that the writing was on the wall and something had to change.

“It would be nice to be a co-op and doing well, but the reality was it wasn’t doing well. Now we’re seeing the returns on the work we’re putting in and that makes people happy. When you’re getting a decent payout for the product you’re producing, it’s better for your mental health.”

Ten years’ guaranteed payout on par with Fonterra finally puts West Coast farmers on an even playing field and he says that will

Shari Ferguson. “More wanting out than wanting in.”

hopefully encourage buyers to the region who have been sadly missing in recent years. Land prices are lower than other regions and he says there’s opportunities to make a good return on investment now the region has a decent payout.

It’s not happening yet though and despite the higher payout, farmers eager to sell up and retire are still struggling to find buyers. Shari Ferguson from PGG Wrightson Real Estate says that’s been a battle around the country, but on the Coast there’s the added challenge of vendors wanting prices of a few years back. Back then a typical dairy farm on the Coast could fetch around $25,000/ ha, but the few sales in recent times have been below $20,000/ha.

“There’s a lot of retiring guys wanting to sell, but they aren’t willing to accept the new level of pricing and are waiting to see if it rises. Only time will tell us that, and in the meantime there’s more wanting out than wanting in.”

While those looking forward to retirement are now making money from Westland’s higher payouts, Shari says they are also wary of more regulations being imposed by the Government and are keen to let a younger generation tackle the new challenges.

Though in a Covid-19 environment, those retiring wannabes are wondering what they would do with the money from the sale of the farm if they did sell.

“With Covid, they may not put their farm on the market because what would they do with their money? Perhaps it is better left in the farm.”

The West Coast property season tends to be late summer because spring is invariably wet, so she says that period will reveal how many farmers decide to put farms on the market, their expectations and what buyers will pay for them.

Many potential buyers have been limited by some banks’ appetite to lend, she says. That means buyers usually have to be low-risk to the bank and have 50% deposit, which limits sharemilkers who have traditionally been in the buyer mix for cheaper farms.

She is beginning to get inquiries from investors though, who are finding they aren’t getting great returns on their usual investment avenues and are looking at other options.

DairyNZ consultant Angela Leslie agrees most banks have a more stringent criteria for lending now than they did in the past, especially those with high exposure to agri. But there are also a couple of banks looking for clients, especially motivated buyers with money behind them.

She says one of the problems for those farmers wanting to retire but unable to sell, is finding staff with the skill level to run the farm so they can at least step back from the day-to-day physicality of the business.

While farmers on the Coast now have more cash in their pockets, she says the lack of farm sales has held back equity growth and that has been holding everything back. And though West Coast farmers are now getting payouts on par with their counterparts around the country, their focus – like their counterparts – is now on the environmental regulations.

“They’ve got money in their pocket after five years of poor payouts, so a lot of years of deferred maintenance and lime to catch up on. The spotlight is changing. The sentiments I’ve come across is the new regulations coming in are causing people distress.”

However she points to the positives in the new regulations, where research strongly correlates that by improving environmental metrics, farmers can benefit from improved profitability. She says being more efficient with feed and reducing N surplus will have a positive impact on the bottom line.

“The practical implications feel like they outweigh the positives right now because we’re stuck in the ‘how the hell are we going to do this’. But there will be some positives.”

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Ten years’ guaranteed payout on par with Fonterra finally puts West Coast farmers on an even playing field.

‘Before, it was tough and frustrating – demoralising seeing farmers in other regions getting more. We had an underperforming dairy factory and a limited amount of light at the end of the tunnel and it became clearer and clearer that the writing was on the wall and something had to change.’

DairyNZ’s Step Change project is focused on helping farmers with resources and support to help lift profit while contributing to better water quality and reducing greenhouse gas emissions. It recently held workshops along with AgResearch on the Coast and discussed West-Coast-specific onfarm data and modelled potential scenarios for change and she says it is an ongoing project specific to the region.

Importantly though, it’s about ensuring their farming practices today are not impacting on the environment in the future, she says.

“Our waterways are generally very good here on the Coast, but we don’t know what the impacts of our practices will be on them in 20-years’ time. Some parts of the Coast are already being impacted by a changing climate. There are increasing instances of facial eczema occurring which suggests weather and pasture conditions have changed to support this challenge.”

She sees the new environmental regulations as another step in moving forward and higher payouts under Yili ownership will help West Coast farmers take that step.

In the meantime, farmers are spending on infrastructure, often upgrading their dairies and a rare new dairy has been built. It’s the first new dairy Westland Dairy Sheds has built in the region for years and co-owner Christine Mahuika says it has been part of a busy year for the Hokitika business.

“For the last three to four years there hasn’t been much done at all – just the necessary maintenance. Now people are feeling a lot better about things and there’s a lot more maintenance happening.”

That includes plant upgrades such as automatic teat sprays and cup removers with the latter helping to reduce labour in the dairy which has been an ongoing issue, she says. In their own business, they struggled to find more staff and many farmers are still short of staff.

While farmers are spending money on infrastructure, Yili has been investing tens of millions of dollars in the business to produce better quality products, while focusing on efficiency and quality.

Westland’s general manager for shareholder services, Tony Wright, says Yili has also installed numerous new vats on farms that needed upgrading. Between Yili’s investments in the region and farmers spending a higher payout, he says money

is flowing into the local economy.

“Farmers know they can spend the money because the payout is going to be there. Last year was a good year to be a first year because the payout was so good.”

Eighty-five percent of Westland’s forecast payout is paid in advance, with the final payment for the 2019-20 season paid on October 1, coinciding with the first payment for the 2020-21 season.

Looking ahead, Frano says he is confident the West Coast has a good future in dairy farming under Yili’s ownership and he gets the feeling that positivity is shared by other farmers.

“We have confidence Yili is here for a very long time. We just want to try and support them and supply the product they need to do a good job. If they are doing well, then hopefully we are doing well.”

The 10-year guarantee to match or better Fonterra’s payout is not something he dwells on because no business can guarantee where it will be 10 years down the track. One of the tasks for the suppliers’

Angela Leslie.

committee is to work with Westland to develop a long-term plan that fits with Yili’s vision. The 10-year figure does worry some farmers though, he admits.

“Some farmers are worried about what happens after 10 years. But a lot of businesses (outside dairying) don’t know where they will be after 10 years and all things are pointing that Yili wants to be here for the long haul.”

Right now, he says farmers are keen on consolidating their farming business rather than expanding; ensuring they have a solid farming operation that meets environmental requirements going into the future and making the most of the guaranteed payment for the next nine years.

Until Yili, financial stress was the towering problem on the Coast, but now he echoes concerns that the inability of an ageing farming population to retire is the region’s biggest issue.

“There needs to be innovative ways for farm succession. There’s not a lot of young people moving to the next step of farm ownership and I think there could be a win-win for everyone if farmers explored different equity partnerships or share options. That would let farmers step back with skin in the game, but without the grind of everyday farming.”

In their own farming business, they are in an equity partnership with family that bought a beef farm and converted it to dairy and he says it’s a setup that works well for them.