Dairy Farms: Got Milk? In Your Portfolio, That Is

A gallon of milk is more expensive than a gallon of gasoline. It may be surprising to some, but the value of dairy products is rising rapidly. In …

A gallon of milk is more expensive than a gallon of gasoline. It may be surprising to some, but the value of dairy products is rising rapidly. In light of these increasing prices, and because June is National Dairy Month, investors may want to consider getting involved with dairy farms so they can profit from milk’s record values.

The average cost of a gallon of milk in New York City was $4.31 in January, compared to $3.18 at the same time last year, according to the New York Daily News. The rising cost of corn, a primary element in cow feed, is an important contributing factor to milk’s skyrocketing values. The cost is also being boosted by a shortage of supply because of drought in top dairy exporting countries and increasing demand around the world, particularly in China.

With more than 1.3 billion residents, China is the most populous country in the world. Traditionally, Chinese diets have not called for a large amount of dairy products, but increasing Western influence is having a significant effect. In the past eight years the country’s demand for milk has tripled, according to NPR. China’s Prime Minister Wen Jiabao has said that he hopes to eventually have a half liter of milk per Chinese child per day. Approximately 267 million of China’s residents are under the age of 14, which would amount to a minimum of 133.5 million liters (approximately 35 million gallons) of milk per day for children alone in China. If Jiabao’s desire is realized, this could potentially raise the global value of milk even higher.

“There is a growing belief that the global demand [for dairy products] will exceed supply for some time, keeping prices strong,” Richard Bourne, marketing manager of Roger Dickie New Zealand Limited (RDNZ), a New Zealand-based farm, forest and property investment firm, said.

China’s dairy production is increasing at a rate of 10 to 15 percent, but it still has not reached a level where it can support demand and the country is expected to continue importing a significant amount of its milk, according to MilkProduction.com. In Beijing, average milk consumption is approximately 46.2 kg per capita. Consumption of this amount is likely only met by residents in large cities, but even so it is predicted that China will need an additional 16 million tons of milk per year. This amount is roughly the equivalent of all the milk produced in New Zealand, according to the International Farm Comparison Network (IFCN).

New Zealand is the world’s largest dairy exporter. The country’s total value of merchandise exports rose 18.4 percent between November 2006 and November 2007. Dairy and petroleum products accounted for 90 percent of the increase, according to FoodProductionDaily.com.

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“Producing milk is one thing, processing and selling it for a profit is quite another and this is where the New Zealand dairy industry excels. New Zealand is responsible for 35 percent of international trade in dairy products and derivatives supplying 140 countries with the USA as the biggest market,” Bourne said. “There are opportunities in other countries such as [those in] South America but they tend to lack infrastructure, product [research and development], marketing and in some cases political stability.”

Though it may normally be the most productive and stable dairy exporter, New Zealand is in a state of drought that is having an adverse effect on agricultural conditions. A recent Rabobank/Nielson Survey taken across New Zealand showed that the number of farmers expecting the rural economy to get worse had increased 16 percent since the previous survey, to 38 percent. The confidence of dairy farmers fell the most, with only 15 percent expecting the rural economy to improve, compared to 59 percent in the previous survey. The drought and consequent fall in supply is an important factor in the rising value of milk and savvy investors may be able to profit if they do their research well.

Foreigners looking to invest in the New Zealand dairy industry need to receive approval from the country’s Overseas Investment Office (OIO), which can be arranged on an investor’s behalf by an agricultural investment firm such as RDNZ. Investors can choose to have sole ownership of a farm or to share the investment with multiple investors for a smaller financial risk. Successful, debt-free dairy farms in New Zealand should return 6 to 8 percent annually, according to Bourne.

But there are also options for American investors who prefer to invest a little closer to home. In May 2007, the U.S. was a net dairy exporter “for the first time in memory,” according to The Capital Press. The Foreign Agricultural Service estimated the total value of U.S. dairy exports to be $246 million in May 2007, which was 19 percent higher than the previous year. A recent USDA report predicted that U.S. dairy exports would increase by $1.1 billion, with values rising the most for nonfat dry milk (NFDM), because of increasing world demand and the reduced supply from New Zealand during the drought.

California, Wisconsin, New York, Pennsylvania, Minnesota and Idaho are the top six dairy producing states in the U.S., in that order. Together, they produce nearly 60 percent of the nation’s milk, according to the Penn State College of Agricultural Sciences. Some states, such as Wisconsin and South Carolina, offer dairy investment tax credits. Investors should look into possible tax incentives in the state in which they want to invest.

Several factors need to be taken into account when evaluating a potential dairy farm investment, whether abroad or right next door. When RDZN scouts for dairy farm investments, it tends to prefer farms that are underperforming and can be improved, Bourne said, so investors may wish to follow this strategy. Investors will also need to evaluate not only the farm’s location, but also the local climate, soil type, water supply and the potential environmental impact a dairy farm will have on the area.

One of the adverse environmental effects that investors should consider is the substantial amount of methane gas that cattle produce. The world’s cows emit 80 million metric tons of methane each year, accounting for 28 percent of the world’s human-related methane emissions. In the U.S., cattle make up approximately 20 percent of methane emissions, producing 5.5 million metric tons of the gas per year, according to the Environmental Protection Agency (EPA). However, great reductions have been made in the amount of methane gas produced by U.S. dairy cows through nutritional and genetic improvements, according to the EPA. Dairy cows emit less methane gas than beef cattle do.

Another important consideration is the potential for deforestation. Not paying attention to the effects of deforestation when creating dairy farms results in a “double whammy,” according to Greenpeace, meaning that not only is the land stripped of the natural trees but the forest is replaced with herds of cows that emit methane and contribute to greenhouse gases. Investors considering dairy farming should look into environmentally sustainable farming methods in order to avoid these problems, and consider hiring an advisor to help implement them.

“The on-farm management and labor team are critical to the profitable running of the farm,” Bourne said. “Ensure the on-farm team is monitored by regular visits by the farm consultant, and [that] proven procedures and reporting systems are in place for the monitoring of all facets of farm operations with regular communication between all parties.”

Accredited Agricultural Consultants (AACs) should be employed to evaluate the investment and provide ongoing professional advice unless the investor has substantial agricultural knowledge. AACs advise on everything from financial planning to production and operation issues to personnel management, and can be an incredible asset. Investors looking for an AAC to assist with their dairy farm investment can contact the American Society of Farm Managers and Rural Appraisers (ASFMRA) or simply conduct a Google search.

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