Aerem chases $740m in the latest of dairy investment hype

Australian dairy farming and processing is attracting a lot of interest, but investors and farmers should be wary of ambitious targets from new hopeful Aerem.

Rapidly growing investment in Australia's dairy sector is delivering some big wins for farmers and investors, but some ambitious plans to create new dairying enterprises are failing to get up and could tarnish the sector.

Chinese demand for dairy and the hype around Canadian group Saputo's purchase of Warrnambool Cheese & Butter has helped drive the success of companies such as the listed Bellamy's.

 It has also been a factor behind dairying investment decisions made by billionaires Gerry Harvey, Gina Rinehart and China's own entrepreneur Lu Xianfeng, who just bought Australia's largest dairy company Van Diemen's Land for $280 million.

While the hype has helped the clamber of advisers, bankers and brokers who are itching to list new companies there are questions as to how beneficial it is for investors and primary producers. Some companies have not fared well. Australian Dairy Farms Group's share price has lost 60 per cent since its high last year.             

The latest company seeking dairy farming fame is one with a story, so far, of failure and frustration. The company, originally known as Linear Capital and now going by the name Aerem, which is Latin for the word "air", set out last year promising around 50 farmers in Victoria's south-west that it would buy their dairy properties.

The properties were to be used to build a massive herd of cows producing a major share of Victoria's total milk supply. A major Chinese investor was meant to stump up the equity to support the acquisition, but it never eventuated and month after month the farmers started to lose hope.
'It's been comical'

Half a dozen farmers whom The Australian Financial Review has spoken to refuse to go on the record about their frustrations. Many have restrictive options agreements and have been counselled by lawyers.

Pat O'Keefe owned a farm at Winslow and was in talks with the company. "It's been comical," he said. "One of them came out here. He had no farming experience and we probably talked more about horses."

Mr O'Keefe said he was "doubtful" from the beginning and decided to sell to another party. "We got a good offer which was a bit under theirs."

Many are questioning whether Aerem will ever eventuate. Investment bank JP Morgan has taken on the job of trying to help raise $740 million of debt and equity.

The promethean task was given the codename – Project Matador – which may not be the best name, given that the company will own a herd of cows.

In documents outlining the proposed investment in July and August – and the Financial Review has been informed the proposal has again changed significantly – Aerem proposed to have spent $384.1 million buying the farms and cows by September of this year.

A KPMG due diligence report on the plan noted that: "Aerem has authority for sale of real estate agreements to acquire 66 dairy farms, in Western Victoria for a total price of $312.8 million –  45,404 acres [18,374 hectares] in total."

To this day there is still yet to be one settled purchase by Aerem.
Creating a quagmire

The plan also included increasing milking numbers from 28,000 cows to about 52,000 cows by May 2019.

The vice-president-elect of Dairy Industry Association of Australia's Victorian division, Darryl Cardona, said that without any further land acquisition and with normal winter rains that plan could spell trouble.

"It risks being like the Blackmore Wagyu company, which was carrying twice as many cattle, and the Murrindindi Shire Council shut him down because it was determined that he was carrying too many per hectare. He was just going to create a quagmire."

Aerem intends to increase the size of the herd as part of increasing productivity. In the plan it said it wanted to increase annual milk production by 68.6 per cent over five years by increasing the herd size, making feed improvements such as increasing the amount of grain fed, and by improving capital investment and management structures.

"It does seem a bit far-fetched," Mr Cardona said.

Glenthompson Pastoral Company's Ted Mann is one farmer whose property Aerem wants to buy.

He said the expectations of higher productivity are possible on his farm but it can be risky.

"You could double production on our farm, but it's not how you want to run it, because it increases the stress on everything and we don't farm like that," Mr Mann said. "We cop a bit of criticism because we under-stock, but it means that we don't come under pressure during the downturns."

Dairy farmer Chris Gleeson of Elm Banks Holsteins near Warrnambool is sceptical.

"It's not impossible, but it's highly unlikely that it will happen because of increased costs. We have a high milk price but we also have high input costs."
664 kilograms of milk solids

In the Aerem plan it estimated that the Friesian cows it ends up owning will produce about 528 kilograms of milk solids per cow per year. Some agronomists said the average for all those herds would be more like 480 kilograms. Aerem expected the herd to increase production to 664 kilograms per cow per year.

Darryl Cardona said that besides using better genetics, companies can increase their productivity by using more grain, but that can be risky because grain prices can be volatile.

He says that a kilogram of grain costs about 45¢ and can be converted to an extra litre of milk production, which the farmer is currently selling for about 45¢. The cost of grain in Australia tends to fluctuate in the opposite direction of the $A, so as the $A falls it exports more and the domestic price of grain goes up.

Beyond the increase in productivity there also remain questions around the complexity of Aerem's plans for processing the milk into products such as infant formula – a food highly sensitive to health regulations.

The company's Troy Harper and the company's advisers have declined to comment on the company's plans.

A spokeswoman for the company said, "Aerem is continuing to work directly with interested investors and local farmers to finalise this complex but highly prospective project, which is a unique opportunity to maximise international demand for quality infant formula."

Michael Stewart of Charles Stewart & Co, who has been arranging the properties for sale, has not responded to inquiries.

Resource: http://www.afr.com/real-estate/aerem-chases-740m-in-the-latest-of-dairy-investment-hype-20151211-gllqi2