e-newsletter - NZ Farming Systems Uruguay – November 2009

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e-newsletter - NZ Farming Systems Uruguay – November 2009

e-newsletter - NZ Farming Systems Uruguay – November 2009

Welcome to the latest edition of our e-newsletter.

Operating conditions

Spring saw consistent rainfall patterns in Uruguay which has kept soil moisture levels up and boosted pasture growth. The spring pasture growth was initially slow with cooler than normal temperatures however more recent conditions have been very favourable. The good rainfall has allowed pastures to recover from the prolonged drought last summer and autumn, and supplementary feeding of milking cows has steadily decreased.

Although it is only the start of summer and the climate can change quickly, we are in much better shape than this time last year, with good soil moisture levels across all farms, and with 800 hectares of irrigation now operational.

On the farms

Pastures are now providing good levels of feed with average pasture share of diet reaching over 90% in November making supplementary feed largely unnecessary on most farms, other than for recently calved animals and as dietary assistance to get animals in calf. Urea is being applied to increase pasture growth and pasture covers in the lead-up to summer.

Strong emphasis is being placed by the farm management teams at present to control pasture quality, particularly on the fescue paddocks. Control is either via the use of dry cows or silage harvesting, or as a last resort topping of paddocks.

Some grass silage and baleage has already been harvested. These feeds will provide a buffer if any pasture shortfalls should occur before the forage sorghum is available. In most areas the majority of the forage and grain sorghum has been planted, and has already struck and is growing well – this covers about 8% of the dairy land area. The farm teams and contractors are working hard to get things done between the intermittent thunderstorms (these are occurring 1-2 times a week at present!).

The forage and grain will be used strategically during any dry periods over summer to supplement the cows’ diets. Combined with the increasing integration of the irrigation systems on farm, these feeds will provide a well-balanced nutritional regime for the milking cows over the coming months.

Milk production has certainly picked up as forecasted, with the rolling 12 month period to October achieving 57m litres, up from 45m litres in the 12 months to June 2009, and with a spring peak of 8.5m litres for the month of October. Milking numbers have peaked for the spring season at just on 20,000 during November, with average milk production per cow running at 13-14 litres per day. This is in line with forecast guidance previously issued but is lower than we would eventually expect, as the cows started their milking season with body condition not fully recovered from last year’s drought. Accordingly, their peak milk production was not as high as we would expect in future years.

Production on individual milking sheds during spring ranged between 10-19 litres per day – depending on each herd’s stage of lactation. By the end of spring, the lactating cows were in good body condition (average >4.0 Condition Score or CS, with 5.0 considered optimum), as a result of the favourable climate and feed conditions. A good percentage of the dry cows are >5.0CS, and these are on a strict maintenance diet. Those that are lighter are being preferentially fed on pasture to lift condition as quickly as possible. The favourable body condition should put the herd in a strong situation for next milking season.

Milk production per dairy hectare for the 12 months to October was 420kgms/ha, the same as for the year to June 2009, although with a number of new sheds in production year on year which holds the average back. Milking sheds in their second or subsequent year of production averaged 440kgms/ha for the 12 months to October. Menafra monitor farm, currently the best-performing of the farms, has achieved 345kgms/ha in the four months to October, up from 284kgms/ha during the first four months of last year, in its monitor milking shed.

Farm working expenses have continued to be tightly controlled, with total farm working expenses for the 12 months to October being slightly under the 12 months to June 2009 $US22.7m. We expect farm working expenses for the full year will be in line with forecast, which is slightly above last year’s actual spend, due to the large increase in milk production and milking sheds in operation.

Spring calving is now virtually complete, with around 3,500 young female calves still being reared in November, of a total 5,300 born since June.

Irrigation construction timeline is on track with pivots commissioned at La Gandara and Monasterio fully operational, taking the total irrigated area to 800 hectares by the end of October. Further progress is underway towards the expected 1,600 hectares total irrigated area this summer. The five new milking sheds funded by the recent $US30m bond issue are under construction, with commissioning expected in autumn 2010. The high-tension electricity infrastructure project construction is also underway in the east in conjunction with the Uruguayan government electricity authority UTE, and this project will allow further irrigation and much improved reliability of electricity supply.

Annual Shareholders’ Meeting

NZFSU held its Annual Shareholders’ Meeting in Auckland in October and despite some media reports to the contrary, it was a balanced meeting with a number of shareholders participating in discussions during and after the meeting.

Both the Chairman, Keith Smith, and the Manager, Michael Thomas, talked at length about the difficult operating and climatic conditions that existed in Uruguay during the financial year and the significant impact those issues had on our bottom line. Their presentations are available on our website under Investor Information / Results Announcements (http://www.nzfsu.co.nz/page.pasp?pageid=107).

At the meeting, some shareholders rightly expressed disappointment at the results but they by and large understood the circumstances that affected our operations.

Media reports were varied but followed two themes. A NZPA “wires” story talked about our plans to raise further funds and intentions around farm developments – their copy made it into papers across the country. On the other hand, certain other media focused on the shareholder questioning rather than operational performance and portrayed the meeting that way. This approach made headlines in newspapers to varying degrees of detail.

NZFSU Management Agreement

PGW and NZFSU recently announced that changes had been made to the Fund Management and Farm Management Agreements with PGW subsidiary PGG Wrightson Funds Management Ltd (PGW).

Discussions between the two companies in respect of proposed changes to the Fund Management and Farm Management Agreements were initiated by NZFSU Independent Directors, and following a full review process, various changes were agreed.

The review considered changes in capital markets and their impacts on investors’ expectations and perceptions, and the components and structure of the current agreements. We believe the changes to the agreements will be to the benefit of all stakeholders.

With the support of the Independent Directors, the following changes have been made:

1. The Fund and Farm Management Agreements have been merged.

2. The management fee percentage has been reduced from 1% to 0.75% for gross asset value above $US400million (gross asset value at 30 June 2009 was approximately $US215million).

3. PGW will, at NZFSU’s request, accept shares rather than cash for any future performance fee payments, subject to compliance with relevant law and listing rules.

4. PGW’s right to charge a margin for the provision of Farm Management services (although it has not been exercised) has been waived by PGW.

5. A management performance review clause has been inserted to implement a formal annual review process.

6. Any agreed farms sold and managed under any sale and leaseback arrangement would incur a reduced 0.5% management fee.

In exchange for these amendments, NZFSU has agreed to extend the Farm Management Agreement term to align with the Fund Management Agreement.

The amendments took effect immediately and a copy of the amended agreement is on the NZFSU website under Investor Information / Company Information/Prospectuses (http://www.nzfsu.co.nz/page.pasp?pageid=109)

Outlook

At the recent annual meeting we anticipated milk production of 80-85m litres in the 2009/10 year, with a milking herd of 18,000 by June 2010. It was also noted that if milk prices were around US20c per litre we expected to take two years to achieve breakeven operational cashflow, and profitability, with around $US 20m of operating cashflow deficits over that period. Analyst consensus based on those milk prices is for a loss in the range of $US 10-15m at EBIT level in the current 2009/10 year and a smaller loss in 2010/11. We are comfortable with the analysts’ consensus for this financial year.

The recent increases in international dairy prices have been larger than anticipated, which is positive for the company. Fonterra’s latest payout forecast of $NZ6.05/kgms, which includes $NZ5.70/kgms milk payment and a $NZ0.35/kgms value-add dividend on shares held in Fonterra, equates to approximately US30c per litre at the farm-gate at a 75c NZ/US exchange rate.

In Uruguay the farm-gate milk price has also increased steadily from a low of just under US19c per litre at the end of 2008. We received US24c per litre in October, and would expect further increases as the benefit of sales contracted at current higher international price levels are achieved by Conaprole and flow through to the farm-gate. As with New Zealand, the Uruguayan peso has also strengthened significantly, offsetting part of the benefit of international dairy price increases.

Although the climate is currently more favourable that it was last year, it is only early in the summer and the climate can change rapidly. International dairy prices are much more favourable than originally expected, however we do anticipate significant ongoing volatility. Thus the positive factors we are seeing do need to be balanced against still being at an early stage of the financial year.

Uruguay General Election

Jose Mujica won the Presidential election held on 29 November. He is from the Frente Amplio party in the current centre-left ruling coalition. Amongst his initial comments, President-elect Mujica has said that his government will continue with existing policies established by President Vazquez, with running-mate and ex Minister of the Economy, Danilo Astori, to be Vice President with oversight of the economy when the new government takes office in March 2010.