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Uruguay dairy venture improves on last season

Tuesday 16th February 2010

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New Zealand Farming Systems Uruguay has done much better in the first half of the financial year compared to last season, but the corporate dairy farmer and land developer still has a way to go before it achieves profitability in its South American venture.

For the six months to December 2009, NZFSU made a loss of just under US$7 million, and expects to lose $10 million to June 2010, compared to the almost $46 million loss for the June 2009 year.

“The company has established good momentum after the difficulties experienced in the previous year,” said chairman John Parker. “Milk prices have improved, and tight cost control has resulted in a much improved performance. Last year’s drought, poor prices and a lack of funds have been, or are being addressed to the satisfaction of directors.”

NZFSU said it is still a long way from steady state production on most of its existing farms, and it still has many farms to develop. This includes large increases in the proportion of irrigation on individual farms, much of which is now being funded by a successful Uruguayan US$30 bond issue last July. This bond issue is allowing the irrigated area to increase to almost 3,200 hectares from a current 1,240 ha.

The company expects half an eventual 20,000ha of its farms to be irrigated.

The half-yearly earnings statement highlights a 42% increase in revenue to US$10.9 million, and a 70% increase in milk production to 42.1 million litres. This is partly on the back of a jump in milking cows of 8,300 cows to 19,600 at the end of last year.

At a forecast production level of 100 – 110 million litres for the 2010/2011 financial year, NZFSU expects a small loss as previously stated, with a profitable operation in 2011/2012.

Production levels on its Uruguay properties was 290 kg of milk solids per cow, and 430kg/ha. This compares with equivalent average New Zealand production of over 300kg/cow and more than 850kg/ha.

“Achievement of the full-scale production target of 940 kilograms of milksolids per hectare by 2014/15 would imply positive EBIT of $35-40 million at that point,” the half yearly earnings report said. “Although the company expects a number of farms to achieve steady state prior to this, on average it is expected to take until 2014/15 for steady state to be achieved.”

Parker said its best Uruguay farm, half irrigated, was already achieving a production level of 750kg of milksolids per hectare. The phosphate fertility levels on many of the properties was around nine, compared to highly fertile New Zealand dairy farms of about 25.

As well, the original American based Holstein cows are being changed to New Zealand cow genetics that are suited to a pastoral based system.

Based on potential production increases to come, Parker is confident of achieving the original prospectus’s 940kg of milksolids per hectare.

“In hindsight the speed that we predicted we’d get there was overly optimistic,” Parker said.

The legally due $17 million management fee to be paid to PGG Wrightson is also a millstone around NZFSU’s neck. NZFSU would rather pay it in stock, but given Wrightson’s preference for cash, while it may not necessarily be paid by the March deadline, the sum plus interest will be paid Parker said.

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