Landcorp strategy of dairy investment over dividends at odds with government’s surplus goal

Landcorp Farming, which is taking on debt to convert former forestry land into dairy farms, won’t pay a dividend this year, highlighting the friction between the state-owned farmer’s long-term strategy and the government’s demand for regular payments in preference to investment.

New Zealand’s largest corporate farmer posted an 84 percent decline in annual profit to $4.9 million, in line with its forecast of $1 million to $6 million, as revenue fell 12 percent to $213.5 million on weak milk and lamb prices.

Debt rose 25 percent to $222 million, mostly to fund dairy conversions on the 26,000 hectare Wairakei Estate north of Taupo, slated to become the biggest milk producer in the southern hemisphere. Landcorp is 12 years into a 40-year lease to operate and develop the estate.

The government, which may not meet its target of returning to budget surplus this year, has stepped up pressure on Landcorp to review the Wairakei development as it increases debt at a time when milk prices have slumped below the cost of production. State-Owned Enterprises Minister Todd McClay told the company in December that he wanted it to avoid any strategies requiring significant capital investment, increases in overheads or reductions in cash returns.

“The existing arrangement with Wairakei Pastoral Ltd requires large capital expenditures over the next few years that have an impact on the company’s debt levels and its ability to pay dividends and is inconsistent with the government’s preference for cash returns over balance sheet growth,” McClay said in a letter to acting Landcorp chair Traci Houpapa.

“Ministers expect positive business performance to result in dividend payments, and that an appropriate balance is maintained between dividends and reinvestment,” McClay said. “Our preference is for dividends over new reinvestment and any alternative capital allocation would require a suitably strong business case.”

This month, Prime Minister John Key and Finance Minister Bill English said the government is in talks with Landcorp about its debt levels and English said the company was having a “good hard look” at the Wairakei project.

Landcorp’s total assets increased 1.5 percent to $1.77 billion in the year through June. Total liabilities rose 13 percent to $361.8 million.

Chief executive Steven Carden has said the company is focused on longer-term developments and wouldn’t be influenced by short-term price fluctuations. It aims to secure fixed-price contracts to insulate the farming operation from volatile commodity price swings and gain higher prices.

“Rather than being dictated to by the fluctuations of commodity price cycles, we’re locking in supply deals with partners who can help us maximise the value of what we produce,” Carden said today. “In the medium and long term we intend to expand our portfolio into new, high-value products.”

“There’s unlikely to be a dividend this year, I think, given the current trading conditions, paying a dividend isn’t a priority at the moment so this will be one year that we won’t be paying a dividend,” he said. “At the moment the priority is very much on just managing debt and cash flows. It would be an unusual year to be paying a dividend I think for anyone in the farming sector.”

Landcorp paid a $7 million dividend in the 2014 financial year, when it made a $30 million profit. Carden said it has paid $500 million of dividends since the company was formed from the former Department of Lands and Survey in 1987.

Carden said the company will probably forecast earnings for the current financial year at the end of October, when it has a better gauge on its stock levels following lambing and calving and more information about the outlook for milk prices.

“There’s so much volatility in milk pricing at the moment, we are not prepared to make a forecast at this point, but clearly it’s going to be another tough year,” Carden said.

Fonterra Cooperative Group, New Zealand’s largest milk processor, this month cut its forecast payout to farmers in the current 2015/16 season to $3.85 per kilogram of milk solids, from $4.40/kgMS in the 2014/15 season and a record $8.40/kgMS in 2013/14. Dairy NZ estimates $5.70/kgMS is the industry average breakeven point for most farmers.

“We are really well positioned for that as a business because we carry very low levels of debt and we have got a pretty diversified business which can help us weather these challenges,” Carden said. He expects the milk price to return to $6-$6.25/kgMS over the longer term.

The company isn’t planning to step up sales of its properties to reduce debt, he said.

“We are not certainly in a position where we need to be hurriedly selling off land because we are just facing a couple of years of low payout. We have got low debt, the business is well positioned to absorb any of the shocks and we only make those sort of very strategic decisions about farms with a long-term view on what the return profile for those properties is.”


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