My father died in January 2004. By then his off-spring, including me, had scattered to the ends of the earth to pursue our financial and academic destinies. The absence of his heirs was a big issue for my father’s trustees and advisors. They loved the old boy but wondered whether it might not be best just to tidy things up selling up Craigmore Station.

This was a situation that could not be untangled from the comforts of Bayswater, so my wife Bridgie and I put a manager into my UK/US financial data business and moved back to New Zealand in 2004. To manage Craigmore Station and return to my farming roots.


In this Commentary I review the 10 years since my return to the family industry (the most recent five of them managing third party capital into agriculture, via Craigmore Sustainables LLP). I conclude with a list of 10 lessons learnt as a “Financial Farmer”.

The early years: application of an excessively simple financial model to farmland

My early years back in farming roughly followed the patterns of grieving:

  1. Denial of my father’s legacy: Upon arrival I felt Craigmore Station was too backward looking. When sheep were so profitable (they looked good in a spreadsheet in 2005) why did we have only 6,500 ewes, and carry such large numbers of lower return deer and beef cattle?
  2. Anger and Frustration: followed as South Canterbury experienced cold springs and dry weather in in the years 2006-2008. This did not sit well with the 10,000 ewes we now had lambing on Craigmore Station. Undernourished livestock are tough on morale as well as bad for financial returns.
  3. Guilt: Our ewes were producing 15,000 lambs each year. Our feed budgets told us we had enough annual dry matter for them, but with each early spring we struggled to get the feed at the right time of year. In contrast deer, calving later in the spring, better matched the supply of feed on “summer safe” Craigmore Station. Being responsible for 25,000 hungry sheep each spring was a harrowing experience and taught me how, no matter how good plans look in a spreadsheet, they need to be able to cope with the variances of the seasons
  4. By 2009 Acceptance started to set in. My father used to say that Craigmore Station was best suited to around 1/3 sheep, 1/3 deer and 1/3 cattle. I now understood why. Since then my equity partner at Craigmore Station Dan Chaffey and I have been gradually shifting the property back to that mix.
From grieving to growing

By 2007, Craigmore Station had stabilised operationally and financially and we decided to grow our acreage through purchase of additional adjacent blocks of land. This enabled us to grow the 1,500 hectares I inherited to 4,000 hectares.


In the last couple of years annual operating profits from the core 1,500 ha Craigmore Station have begun to exceed the annual revenues of the property I inherited. This came about as we invested in improving, in a myriad of small ways, a good but undercapitalised property. Annual revenues of the entire business are now five times higher than those from the original farm and these revenues now flow from a wider range of crop types with dairy as well as red meat. Introducing irrigation is also improving both profit margins and reliability of the business. Irrigation is a joy both from the perspective of animal welfare, and staff morale, since it enables us to look after our livestock properly, largely irrespective of what the season throws at us.

Bringing in outside investors

In 2009 we decided to confine investment in our family-owned farming operations to a 25 kilometre radius of Craigmore Station and began co-investing in farming and forestry land elsewhere in NZ alongside other investors. The Craigmore Farming Partnership is now managed day-to-day by Bridgie’s brother, Mark Cox and will be closed to new investors in June of this year. With, we expect, about $250 million of equity. Along with the Craigmore Forestry Portfolio of 11 blocks in the North Island, the Craigmore team now manage 25,000 hectares of “perpetual real assets” of various types.


Mark and his team have now secured NZ$340 mm of good farming assets for the farming portfolio, the vast majority of which is made up of an irrigated pastoral dairy estate that will milk 15,000 cows from August. Mark has introduced a management system of pods which are adjacent groups of three to six farms, all managed by a “pod manager” who has equity across the group of farms under his management.

Buying at the right time is a great source of value

We built the Craigmore Farming Partnership in one of those rare moments in NZ farming history where farm yields (especially in dairy and horticulture, but even in dairy grazing) are paying net cash-flow yields (of 5% to 10%) well above the bank cost of capital (currently 5% to 7% depending on maturity). My father used to say that “the game” in NZ farming was to have access to capital to buy farms on those rare occasions where a farmland de-leveraging occurs. We have been fortunate to find supportive fellow investors who trusted our judgement that 2011-2014 has been a good window to do this. This period coincided with stronger commodity prices from the growing Asian demand for protein.

A Record Fonterra Milk Price Payout for the 2013-14 Farming Season

Source: Fonterra

With dairy farming enterprises this year trading at NZD 45 per kg of MS (potential) production, and a record Fonterra milk payout of NZD 8.70 per kg MS for the season, unlevered EBITDA yields are 10% on farm assets. We think there is only another six months of purchase of our favoured land-use, irrigated dairy farms, at these elevated levels of yields. The NZ farmland capital market, undercapitalised for the past five years, is now rapidly regaining health based on these good cash flows and farmland values will, in my view, continue to increase quite sharply from the levels of the past few years. The units of Craigmore Farming Partnership are “up” around 20% from their inception values two years ago. We will start paying their first dividends in the coming financial year.


Accepting a J-curve of development gains in early years, shifting to income returns in later years

As time goes on, the portfolio will move on from its current “growth” mode where we are acquiring distressed properties and making improvements to a cash generative mature stage. On average a new NZ dairy conversion sees 4% annual gains in litres of milk produced per hectare for the first six years; as “dairy fertility” builds up in the soil, and the management team and livestock settle down. These productivity gains are now flowing strongly within the Craigmore portfolio, with good implications for revenues, and even better for the bottom line.

Craigmore Forestry has lagged farming, but is now “getting going”

Our Craigmore Forestry portfolio has been slower to get going. Forestry assets also have a “J-Curve” in their early years and the fall in the carbon price in NZ from $20 per tonne in 2012 to $3 now also did not help valuations. However, our Forestry portfolio has now grown in value by 6% over the past quarter as a result of the impact of strengthening timber prices. Having been over supplied for the past 20 years, the Pacific Softwood market is forecast to tighten significantly.

The Pacific Softwood market is expecting demand to grow 6 % p.a. driven by sawlog demand from China

Source: Poyry

What this demonstrates is that perpetual resource assets like farmland, forestry and water, properly managed, and with the right capital structure (not too much debt on farmland, none on forestry) will eventually prosper in line with the markets for the commodities they produce.

“Perpetual Resource” assets have a “following wind” of inflation and productivity growth supporting their returns, and in time these will come along to power your investment, provided you are careful, prudent and patient.

So what have been the lessons of my time “back” in farming?

10 lessons from my first 10 years back in the family business
  1. Be careful with overly simplistic production and financial models. e.g. don’t chase inventory cycles – find the right crop mix for the farm in question given long term economics, not one or two year’s commodity prices.
  2. Farms tend to be undercapitalised: they will often offer high marginal returns on the application of capital to incremental improvements.
  3. Don’t buy cheap land, buy reliable land – ideally irrigated or in a high/reliable rainfall area. The obsession of most financial investors (new to farming) with buying land “cheap” on  a per hectare basis means that good quality (more reliable) farmland tends to trade at better yields per $ of capital employed.
  4. Some diversification can greatly help a farming business. In part to risk manage cash flows. In part to force the owners and management team to be more analytic and less “married” to just one farming system.
  5. Timing can be very helpful in applying capital to agriculture. However the natural cycles of commodities and capital markets mean this is not an “obvious” calculation. Typically some sectors will be overvalued at times, while other sectors offer value. Organise good analysis, good data and (again) experience within a self-critical, intellectually honest team.
  6. The returns are in the land. Ultimately it is the land not the livestock or working capital or processor shares that capitalise productivity gains (and basic scarcity) and rise in value. However you need to have the right operating structure to capture these gains.
  7. As our friends at Bidwells in the UK say in their research, those operating structures need to make 20 decisions every day and get 19 of them right. These systems are not the stuff of “command and control” centralised governance. They need to achieve distributed responsibility – hence our heavy emphasis on share-farming.
  8. Productivity growth is the key to understanding the enigma that is real assets: applying “standard” accounting practises to a farm is misleading – which is why farmers tend to “carry on” regardless of their accounts.
  9. As a financial type however I could not afford to ignore the accounts. I needed to figure out “arbitrage free” accounting approaches for real assets – to make farm accounts comparable with other asset classes. It has been this desire to build more accurate models that has led me to build a “Map of Agriculture” database of actual farmland productivity, financial cost and returns data, for over 170 crop-types, across the surface of the earth. We need a better model of agriculture than the home made excel spreadsheets I built when taking over Craigmore Station.

Finally be patient: in any one year the returns may look ordinary, but don’t sell early. In general it is not a great idea to sell land!

Many old and new friends have joined us in financing these ventures. Again, the Craigmore team thank you for your incredible support. We will not let you down. Also for your patience reading these Commentaries!

Kind regards, Forbes Elworthy

Published: 27 March 2014