1.  Update on the Craigmore funds

Craigmore now manages 10,000 hectares (25,000 acres) across 16 properties. All in New Zealand. Craigmore ended 2011 with NZ$ 72 mm (US$60 mm) funds under management. We target NZ$200 mm in our Funds by end 2012. Our focus continues to be Farming and Forestry.

2.  A strategy for applying capital to farming

Craigmore’s farming strategy has three main elements:

i)  Quality Land. Craigmore selects farms with high quality rainfall/irrigation, soils and topography. Quality land produces superior yields at lower costs and (most importantly) low variability of returns. We think the “quality premium” one pays  is seldom too great. Especially during a de-leveraging when valuations tend to compress. To use a London retail analogy, “always buy Mayfair rather than Croydon when you can”. Especially during downturns.

This obsession about securing “good land” is characteristic of farmers- as many other property investors. There are few greater pleasures than a productive farm with healthy livestock acquired at a fair valuation. And few more  miserable places  than a farm in drought – no matter the acquisition price.

ii)   Share Farming. Our second main role is to marry up the capital invested in these farms with the best farm managers. These families take responsibility for “their farm” (typically a NZ$10 mm asset) 7 days a week.  From early in the morning, rain or shine. While they remain top quartile (top quartile farmers generate 3% higher returns than average), these outstanding people are the real “hero’s” in our model. Craigmore requires all our farm managers to invest in the relevant farm. We also share some “carry” with them. They are true “Share Farming Partners”.

iii)  Environmental Protection. Craigmore is developing standards for management of: a) bio-diversity, b) nutrients / fertilisers, c) pesticides and d) emissions on each farm. These standards support our “SafeNZ” brand – now accepted as organic equivalent in outlets including the Aeon Group / Jusco Supermarket chain in Japan. These standards support Craigmore’s applications  to acquire land under NZ’s Overseas Investment Act (which specifies that foreign acquirers of NZ farmland must commit to invest both  economically and environmentally in the land.

3.  NZ farmland prices

As recorded in previous Commentaries the NZ government and banking sector are seeking to reduce NZ rural borrowing (it had risen to NZ$46 bn by 2007, from only NZ$10 bn in 2000) The resulting de-leveraging has driven farmland prices down 20% to 40% in the period 2008-2011.

Prices have now “bottomed out” and begun to rise as the more obvious distressed situations have been refinanced.  Even so there remains a significant “overhang” of over-leveraged farms. We believe this once-in-a-generation buying opportunity has six months to a year left to run.

4.  Elevated commodity prices and farm yields in first half 2011

NZ export commodity prices were at record levels in first half 2011 – ironically at probably the lowest point of the rural land prices. As a result of high commodity prices and low land prices some farmers, in favoured sectors, were seeing cash-flow yields at unprecedented 11% or even 12% rates – remarkable for a low depreciation, inflation-proof, low-beta asset. And around twice the historic equilibrium yields.

5.  Softer commodity prices since mid-2011 – but still high cash-flow farm yields

Commodity prices have mostly softened since mid-2011 as Chinese growth slowed and as the Quantitative Easing of 2010 dissipated. So “fair” farm cash-yields in the favoured dairy and horticulture sectors are now 6% to 7%. These yields are still well above historic norms.

We regard the approx 20% fall in most commodities (from very elevated levels) as healthy. Fonterra alone, after receiving revenues of $18 billion, paid out $10 billion to the NZ farmers for milk in 2011. If that level of liquidity had continued the NZ farming industry would have accelerated into another boom cycle. We would like to get more farm managers set up and growing produce on Craigmore-owned farms before that happens!

6.  Forestry markets

Timber markets have also softened since mid-2011. Construction markets on both sides of the pacific are soft. Rebuilding after Japanese and Christchurch earthquakes will provide some offset.

Carbon markets are soft on European disarray. Australia’s decision to set a lucrative minimum carbon price starting at A$ 15 per tonne in 2015, rising progressively to A$17 per tonne in 2017is welcome but not yet directly available to NZ foresters. One promising source of demand for fund credits  is the provision of offsets for owners of pre-1990 NZ forest pursuing higher value land-use. We are exploring this avenue.

In the meantime, despite soft commodity markets the on-going lift in NZ farmland prices should generate significant net mark-to-market gains for Craigmore Forestry Fund’s early years.

7.  A tightening window to acquire international farmland assets

Argentina and New Zealand have each moved, in the past two months, to tighten laws restricting purchase of farmland by foreigners. Argentina has imposed a complete ban for sizable plots of land. NZ is now more strictly enforcing  previous rules where foreign  investors must  commit to add significant economic and environmental value to farmland in order  to acquire. New Zealand does not want only “rent seeking” investors, but rather investors with expertise and commitment to improve NZ’s farming assets and environment.

Craigmore’s strategy has always been to actively manage and develop our farms while  operating high environmental standards. While acknowledging some risk as result of the new jurisprudence Craigmore   therefore remains confident our off-shore investors’ applications should be approved. Especially since the NZ government has also announced it will favour  foreigners’ applications where they co-invest with kiwis and/or employ NZ managers (Craigmore meets both criteria). Once approval has been obtained for land purchases, the Fund will have common-law title to the land. A first rate form of security given the quality of common-law property rights, and that NZ is consistently rated as amongst the most business friendly governments in the world.

With South Africa and Brazil considering similar tightening it is becoming clear that restrictions on investor access to international farmland assets is an increasing trend. Craigmore will continue to monitor the situation and keep you briefed.

If previous waves of “resource nationalism” are any guide (such as oil-field nationalisations in the 1970’s) emerging market nations will more rapidly adopt the measures. We view the developments in NZ as being more analogous  to the UK’s management of North Sea Oil. New Zealand has only 4 million souls, and produces enough food to feed 100 million. It recognises it lacks capital to develop this resource. However it wants to ensure that foreign organisations will be screened to ensure  high levels of proven farming skills, local content provision, desire to invest, and environmental standards flow into New Zealand. It seeks active farming investors, not rentiers. Craigmore is working hard to qualify in New Zealand as just such a suitable owner and steward of these very attractive assets.

8.  An institutional round for Craigmore Farming Fund

In consultation with institutional investors (many thanks to our existing Co-Founder investors for supporting these changes) Craigmore recently modified its Farming Fund terms into a “private equity” structure. We are now launching an Institutional Round with this new structure. Commitments and final diligence are requested in April-May. The Round will close in June.

Warm regards,


Published: 1 April 2012