Information only disclaimer. The information and commentary in this email are provided for general information purposes only. We recommend the recipients seek financial advice about their circumstances from their adviser before making any financial or investment decision or taking any action.
There’s increasing chatter about dairy conversions again—especially here in Canterbury—and it’s easy to see why. In many cases, the extra returns far outweigh the costs. That contrast becomes even starker when compared with lower-yielding farming systems.
Turning a non-dairy farm, whether sheep and beef, deer, or cropping, into a dairy platform is a major strategic move. While dairy can offer strong cashflow and asset growth, it also demands serious capital, operational change and long-term commitment.
At NZAB, we’ve helped fund countless dairy conversions and seen the highs and lows of the sector. Below are some hard-earned lessons worth considering.
1. Get the strategic & family fit right.
First and foremost, ask yourself: does dairy align with your long-term business and family goals? It’s a more intensive, less flexible system that brings early mornings, daily routines and higher management demands. But with the right setup, it can also create better succession opportunities and even help current owners gradually step back from daily operations.
There are many ways to structure management and create a pathway for the next generation. Just make sure you genuinely like the idea of farming cows—and don’t dismiss it too quickly either. Talk to those who’ve made the transition.
2. Start with system modelling for optimisation.
Dairy conversions are not all the same anymore. Due to environmental factors specific to your farm (and likely consent conditions), soil types, climatic factors, available support land and irrigation availability (and therefore growth rates and seasonality of feed supply), this can result in quite a different dairy system on each farm.
To “optimise” your new dairy system, varying infrastructure may be required, with different stocking rates, different feeding assumptions and therefore different operational performance and capital costs. Simply assuming blanket averages for cows per hectare and cost structure is not enough analysis to make this important capital decision (also see point 7 further below on this).
Equally, this may also mean that with new technology and feeding systems, some farms that were traditionally viewed as “unsuitable for dairy conversion” may now be viable.
3. Capital costs are significant—often more than expected.
In the late 2000s, cost blowouts were a major reason for dairy conversions going pear-shaped. Cost overruns, sudden milk price drops (which we’ve seen at least three times in the last 15 years), and tight bank appetite spelled trouble—even for well-planned projects. Even though milk prices bounced back, some of these situations became near terminal for fledging dairy businesses.
Even with a tight budget, expect unexpected costs—earthworks, shed tech and irrigation upgrades. Allow for large contingencies and surplus funding lines from the outset.
4. And then there’s stock…
Buying a dairy herd is a large part of the process. For the last few years, dairy stock prices have been relatively flat around the $1700- $2,000 per cow mark. However, this year we saw some later cow sale prices exceeding this significantly.
In recent years, The New Zealand dairy herd has only been producing replacements solely to maintain a steady state, resulting in a finely balanced livestock supply.
Should there be a wave of dairy conversions, we should expect that the resultant livestock demand will cause prices to elevate and in some cases, result in stock being hard to get and/or quality dropping significantly.
Our message here is three-fold. Try where possible not to compromise on quality, budget adequately in this area, and think well ahead with replacement stock now.
5. Holding costs add up fast.
Holdings costs, mainly interest cost on new lending start accumulating well before the milk starts flowing. These costs stem from:
Plan for them. They’re real and often underestimated.
6. Prepare for a “capital loss” on asset values.
The land value plus conversion cost equation may exceed the final per-hectare value. In theory, market prices should adjust, but in practice some value overhang is likely.
Factor this into your equity calculations and your resultant credit position. A subsequent first year valuation might mean your equity gets tight, which can sometimes present issues for accessing more capital down the track.
7. Not all conversions stack up economically.
Some conversions may require hefty investment in barns, effluent systems or pads to meet environmental standards. At a point, returns—both capital and marginal—can stop making sense.
More infrastructure also means more depreciation. We’re seeing this now with some 20-year-old Canterbury sheds needing major upgrades. Irrigation, houses and other assets aren’t immune either. Important to model this into your long-term return.
8. Build in timeline contingency
Milking starts in late July, so factor in delays from weather, consents or contractors. Build a solid buffer and/or have a backup plan for that new herd about to calve.
9. Don’t rely solely on bank Numbers
Banks currently use ~$7.50–$8.50 for milk payout assumptions and ~7–8% for interest—but how they apply this and corresponding operating expenditure in their modelling varies widely.
Do your own “market case” alongside. Contrast bank metrics to current inflation adjusted “market averages” for milk (>$9/kgms) and 5-year averages for interest rates of ~6%.
Our advice is to complete a “market” business case for the decision to make the investment decision but also complete a bank test to understand your current and ongoing access to funding (both now and in the future).
10. Just because the bank says yes, doesn’t mean it’s a good idea (and vice versa)
Banks love dairy right now—but that hasn’t always been the case. Even with good sector returns, their appetite can shift based on portfolio limits or internal policy. As little as 3-4 years ago, banks (despite good dairy profitability at the time) were much more reticent with dairy lending as they sought to “spread their portfolio risk”.
Just because they’ll lend doesn’t mean you should do it. And just because they won’t, doesn’t mean it’s a bad idea either. Their reluctance to lend to you could be based on the banker’s individual view (not always correct), aspects like history with your bank or due to a poor presentation of your proposal to the bank.
11. Understand what a bad year looks like (maybe $7)—and be able to fund it if it happens.
Payout is a commodity and commodities are inherently volatile, but they do return to their average when examined over 3-5 year periods. So, whilst you are setting your business up to manage an “average” cycle (of around $9), you equally need to make sure that your business doesn’t get “knocked out of bed” with a funding shortfall in a poor year that you don’t have enough working capital for.
This doesn’t mean you need to break even in that $7 year, but make sure you have enough retained earnings or funding headroom to get through that low period.
It’s always much more difficult going to credit for additional funding when the industry is in a downturn.
12. Get the people and organisational structure right
Dairy farming requires more people, diverse skills, and different structures compared to sheep, beef or cropping. Whether you're managing or contracting out, you'll need a team—and fast.
In today’s labour market recruitment is tough, especially in rural areas. Training, housing, and leadership are essential and require a mindset shift for non-dairy operators.
But don’t let any of this deter you from what could be a life changing investment for the future.
Whilst the above considerations (and others not mentioned here, such as consenting processes, pasture and feed conversion timelines and milk processor decision making) might seem daunting it’s not our goal here to deter you. It’s to help you get it right!
Surround yourself with the right advice and experience. Make sure the decision fits your goals. And once you’ve made that right decision, ensure you access the best possible funding and put the right framework in place, so the conversion goes to plan.
So, before you engage with the bank, run a strong advisory process. Call one of our local team members in Southland, Canterbury, Manawatu, Taranaki or Waikato for an introductory chat (or flick us a quick email here)- they have decades of experience in the dairy sector and with dairy conversions. They been through all the ups and downs and we know what works, what doesn’t, and how to position you for success.
Please feel free to share this newsletter with anyone you think may benefit from the content. You are also able to connect with us using the social media platforms below.