Investor Presentaiton

26 The dairy industry in Tasmania A guide for investors 27 22 Dairy conversion opportunities There is potential in Tasmania to create new dairy farms by converting current grazing or cropping farms into dairy units. Ideally a potential dairy conversion property will have the potential to milk 500 or more cows. It will be in either the traditional higher-rainfall areas, or in lower-rainfall areas with access to a plentiful supply of irrigation water at a reasonable cost. The advantage of dairy conversions over existing farms is that there is more scope to have a fully functional farm with new infrastructure, situated in the right place. In addition to this, the scope to grow over time can be built in upfront, rather than hoping that adjoining properties come onto the market over time. There is a substantial amount of land available in Tasmania suitable for conversion to dairying. Tasmania is also one of the few states which has a government water development strategy in place and is encouraging farmers to develop water resources for agricultural purposes. New irrigation schemes currently being developed by Tasmanian Irrigation have the potential to open up new land for dairying. Subject to water management plans and maintenance of environmental flow requirements, it is also possible to obtain new water rights for winter-take into storage. Alternatively, it is possible to buy or lease existing water rights from other farmers or buy water from them directly. Conversion opportunities currently lie in the following areas of the state. King Island There are large tracts of land suitable for conversion to dairying on King Island. There are variations in soil type and rainfall across the island that need to be taken into account. Drainage, soil fertility and a few pockets of salinity are potential issues. There is only one milk company on the island, which is King Island Dairies, owned by Lion (previously National Foods) and its requirement for additional milk will be a key factor in any proposed investment. Far north west There is reasonable for dairy scope conversions in the far north west (Circular Head municipality), including some large beef properties. The climate is ideal for dairying with good rainfall distribution and limited frosts. The far north west is considered the best dairying region in Tasmania and as a result it is already a well-developed dairy area. Some conversions may need to include several adjoining properties. Some of the land in the district, particularly on swamp ground, would require drainage as part of the conversion process. Central north west This area has limited scope for dairy conversions because of the small size of many of the properties. There is competition for the better land from intensive horticulture operations. Base land prices are generally higher than in other prospective areas. Central north There is a significant area of land suitable for converting to dairy in the central north. Large properties currently running extensive cropping and livestock are well-suited to dairying. Rainfall in this region varies considerably and will need to be taken into account when selecting a potential dairy farm. Many of the farms have large historical water rights. Irrigation requirements are also relatively high, due to lower summer rainfall (in some areas) and high evapotranspiration rates. The Meander Dam was completed in 2008 and has the capacity to provide an additional 23 900 megalitres in the Deloraine area, to properties along the Meander River and via four pipelines installed in 2010 (Caveside, Rubicon, Quamby and Hagley). The Northern Midlands is also reasonably prospective, with larger properties, relatively flat topography and with the current and ongoing irrigation development in the area. Several dairy conversions have already been undertaken in recent years. The availability of irrigation water from new schemes being developed by Tasmanian Irrigation will open up additional potential in the Midlands and Northern Midlands over the next few years. North east The north east (Dorset municipality) is already one of the three main dairying areas in the state and there are opportunities to develop further, with large areas suited to dairying with the aid of irrigation. Tasmanian Irrigation has recently completed the Headquarters Road Dam in the Scottsdale area plus an expansion of the Winnaleah Irrigation Scheme. There are also further schemes currently being assessed. As well as the traditional inland dairy areas on the better-class clay loam soils, there is also potential for large-scale dairy development on some of the sandy and sandy loam soils closer to the coast. While the soils are not as naturally productive, winter temperatures are higher with very few frosts. In recent times, many of these properties have installed irrigation (usually pivots) to grow crops such as potatoes and poppies. Some of the soils are not robust enough to withstand continuous cropping, but are well-suited to grazing and hence dairy farming. In some instances, there may be the need to combine farms to get to commercially viable sizes, however there are also many larger farms in the area. Derwent Valley There are large properties along the Derwent River with significant water rights that would be suitable for conversion to dairying. The area has some of the warmest summer temperatures in Tasmania and with the aid of irrigation and improved soil fertility is capable of excellent pasture production. Local sources suggest that some of the better land lies away from the river and therefore water may need to be pumped or transferred over some distance. There are also good alluvial soils along the river itself. Dairy conversion investment has occurred in recent years and has the potential to develop further. South of Hobart There is some smaller scale dairy investment occurring. For example, the Bruny Island Cheese Co. farm expansion in Glen Huon. There is very limited potential to convert land to dairy farming in the area south of Hobart. Potential returns from dairy conversions The following tables provide some indicative figures as a guide to investment. There are many variables to consider in undertaking a dairy conversion, so potential investors wishing to go further should consult widely. A list of useful industry contacts has been provided on the back cover. Assumptions The financial models used to assess the financial viability of dairy conversions use a number of assumptions that underlie the results shown. The key factor in achieving a good result is the ability of the manager. Important profit drivers include: ≫ initial capital cost » pasture utilisation per hectare (and stocking rate) >> labour efficiency and >> milk price. The financial models assume that the management deployed within the system is average or above. Hence so too is financial performance. Significant capital expenditure is included in the models to provide a solid platform for good performance. The conversion farm is assumed to be in a lower-rainfall non-traditional area of the state. Conversion is assumed to require purchase of a water right, at a capital cost of $1 300/megalitre, sufficient to irrigate around 50 per cent of the total effective area. Alternatively, if the farm already has water and irrigation infrastructure, the base price will be higher and the conversion cost will be lower. Replacements are assumed to be run off-farm and limited grain input (around 0.7 tonne per cow) is used. The $5.20 per kg milk solids milk price is the assumed closing milk price for 2016-17. This is below the longer-term trend of approximately $6.00 per kg milk solids. The main assumptions are outlined in the following table and explained overleaf.