THE DAIRY FARM & THE CORPORATE MODEL

Just as New Zealand has had a proud history of producing world class rugby forwards, it also has a proud history of producing world class dairy farmers! For most of our recent history, many would suggest that the secret to the production line of great dairy industry talent has been the traditional stepping stone of share milking. Although there is no reason why the model itself should not continue to provide the most effective means of entry into the industry, the facts are that the share milking model is slowly becoming less and less a feature of the dairy landscape. The reason is not that there is any defect in the share milking model, but more because of the fundamental changes experienced by the industry over the last 10 years or so. Namely: (a) (b) (c) (d) (e) Increasing capital cost of land; Lower profit margins; Aggregation of holdings and move to scale operations; Fewer farm owners; Corporate dairy farming.

It would perhaps become easy to be concerned at the future prospects of the NZ dairy industry because of the apparent disappearance of such an extremely effective succession tool! However, only a brief examination of this issue would reveal that significant benefits are being brought to the industry by new business structures such as equity partnerships, management contracts, joint ventures, and equity managers etc. These benefits include ability to access funds and reduce the costs of production, delegate on-farm management, develop strategic planning and introduce a wider range of succession options. Change is an integral part of doing business anywhere in the world today. Few other business sectors in New Zealand, it is suggested, have embraced change in such a relatively short period of time as the NZ dairy industry. Twenty years ago the stereotypical dairy farmer was, one family, one farm, one son, one herd etc. How this has changed! It is difficult now for one member of a family to acquire the farm at the expense of others. More sophisticated forms of management are required now for family farms. In general terms the mix of ownership of farms in New Zealand could now be summarised essentially as follows: (a) (b) (c) Private family ownership (PFO); Equity partnerships; Corporate ownership.

In each of the above, scale, governance, and management are probably the key ingredients. Scale to increase production and scale to reduce overall costs; thereby providing reasonable returns. Interestingly, within the PFO model there is developing a subgroup that could be referred to as the Family Corporate. A number of farming families are growing their businesses at sufficient rate to become significant multiple farm owners. These Family Corporates are likely to own an increasing proportion of farming businesses. Meanwhile, the proportion of farms owned as a traditional family farm is predicted to reduce, having regard to values of properties and difficulty in resolving succession issues. It is estimated that currently approximately 10% of dairy farms are owned by Equity Partnerships. However there are predictions that perhaps 30% of dairy farms will be owned by Equity Partnerships within 5-10 years.

Corporate dairy farming is well known particularly in the South Island. As investment fundamentals change over coming years, it would not be surprising to see agriculture becoming something of a target for the managed funds sector. The key to this massive change has been the willingness of farmers to adopt a more sophisticated approach to running their businesses and the adoption of the corporate business model. It could be said that the trend is moving from share milkers to shareholders. Because farming businesses have become such large enterprises, farm owners have had to delegate more of the day to day operations on the farm to management teams and focus on more the key strategic matters required to run large businesses. Thus the corporate business model has been adopted widely and is being utilised with various levels of sophistication. The recent media coverage of a high profile failure in the dairy industry highlights the problems that can occur when things go wrong. In future articles we will focus on some of the issues that arise when bringing the corporate model to the dairy farm.