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Don’t overlook New Zealand

New Zealand dairy went through a rough patch last year. But with pricing picking up at the same time as more deal opportunities come to market, investors would do well to take a second look.

On Monday, New Zealand’s dairy farmers probably let out a sigh of relief when they found out that China is again buying their milk, just as prices are on the up again.

After a difficult year for global and New Zealand dairy – and rising dairy farmer debt levels – there seemed to be an air of uncertainty around investment in the country’s dairies. Last year, dairy prices in New Zealand dropped sharply. In 2013-14, Fonterra’s milk price was NZ$8.40 ($5.56; €5.12). In the 2015-16 season, that is forecast to be just NZ$4.15.

When fund manager Craigmore Farming held a NZ$75million first close on its second dairy fund under these conditions in December, some commentators expressed surprise. But as we watch unsubsidised New Zealand dairy taking its first tentative steps towards recovery, we are reminded of arguments for the long-term nature of agricultural investment, even in an industry with relatively tighter margins tied to a volatile food commodity like milk.

What’s more, this could even be a good time to invest. Data released last week by the Real Estate Institute of NZ (REINZ) shows there were 16.9 percent, or 77, more farm sales for the three months ended January 2016 than for the 3 months ended January 2015. Although not many more whole dairy farms are on sale (suggesting that many have survived the downturn) more grazing land in general is. So while some dairy farmers might have struggled throughout last year, that may have created an opportunity for investors.

“[There might be] less development opportunities [in New Zealand] but there is still a market to trade in already developed farms. Institutional investors aren’t necessarily looking to do development, so the fact that a lot of it is already established and has operating history could also be a benefit,” said Towers Watson senior investment consultant Karen Dolenic.

“Everybody gets very bullish about markets when commodity prices are high, and very nervous when commodity prices are low, and we’ve seen both within that period,” Nick Tapp, chairman at Craigmore, which hopes to reach a second close on its latest dairy fund in the first half of the year.

While it remains to be seen how elastically New Zealand bounces back, it has been easy for many to see increased investment in neighbouring Australia – where intensive farming to scale is practised alongside grazing – as a sign that New Zealand dairy is becoming less attractive. China has been moving aggressively into the Australian dairy market, with an A$280 million ($207 million; €185.83 million) Tasmanian dairy approved for sale to a Chinese businessman last week.

But what is going on in Australia – where scale, domestically determined prices, and variable climates, including drought, make the dairy industry quite different – doesn’t necessarily reflect on New Zealand’s place in the world market. And while New Zealand and Australian dairies will inevitably be compared, investors should be wary of linking them too closely.

Even Tasmania, which Dolenic says has some similarity to New Zealand in its abundance of cheap grass for pasture, “is less developed; you don’t have that same ecosystem of providers and employees.” She added that you also don’t have Fonterra, the New Zealand co-operative required by to buy all raw milk produced in New Zealand.

“Being invested in agriculture and farmland is very long term. Investors should try to understand relative competitive advantage in the market not just when things are good, but also when they are bad,” said Tapp.

As is the case for a lot of agricultural investment, only time will tell. But New Zealand dairy should be measured on its own strengths and context – and as a low-risk grazing market, it seems it will be around for the long term.