New Zealand Farming Systems Uruguay (NZS) says it is on track to raise debt funding to finance farm development through to the end of June, but will sell off some of its land bank if needed.
Decisions on this would be made over the next six weeks and chairman Keith Smith said it was unlikely to involve large areas of land. Any sales would be mainly undeveloped farms and he did not expect any fall in value from the time the land was bought.
New funds are needed to fully develop, including irrigation, remaining land holdings. After a US$15.3m operating cash outflow in the six months to December 31, the company has embarked on a serious cash conservation programme and expects reduced operating cash burn in the second half.
It has lowered its development targets, because to develop all of its land into dairying it would need to raise about US$80m to US$90m in debt and Smith said it now made more sense to develop farms than land-bank. About 36,000ha of farmland is owned.
It did not say how much it was hoping to raise in the current debt programme, after taking on US$16m in debt in December. Like that amount, the new funds will be raised from Uruguayan institutions.
Smith said there had not been many recent sales of farmland in Uruguay, due to the impact of the international credit crisis, but there had been sales both above and below formal valuations. He did not believe there had been any impairment in the NZS land values.
NZS made a loss of US$8.9m in the six months to December 31, in what he described as a very difficult operating environment, with serious drought conditions and falling dairy prices. The drought has now broken, but Smith said the direct costs in loss of production and pasture and increased supplementary feed costs had been between US$4m and US$5m.
The current milk price paid by the milk processor Conaprole is US19c a litre, from the peak levels of US40c. The current price equates to a NZ return of about $5.30kg/MS.
Smith said a full year loss at the higher end of the earlier US$7m to US$11m forecast range was now expected. A recovery in dairy prices is not expected by the company until the third quarter of the calendar year, after the end of the European supply season.
Despite the interim trading loss, good progress had been made in farm development and increasing milk productivity.
At current land valuation levels (as at last June 30), the net tangible asset backing is well above the New Zealand share price.
The December 31 balance sheet shows total assets of US$253m, including equity of US$216m, for an equity ratio of 85%. It had about US421m in cash. The net tangible asset backing was US89c - equivalent to NZ174c at current exchange rates, compared to an NZX price of 56c at time of writing.
Rain in January and February has broken the first-half drought, but the recovery in milk production will not result in 2009 budgeted levels being achieved. Despite this, NZS said it was increasing milk production by cow and by the hectare and over the six months to June 30 expects to increase the number of milking cows to 14,500 from 11,500 at December 31. The original June 30 target was 20,000 milking cows.
Full production across the farm portfolio is now expected to be achieved in the 2012-13 year, one year later than initial targets. About 10,200ha of land will be in production by the end of June, down from the original plan of 12,900ha.
Also by the end of June, NZS expects to have 26 milking sheds, up from 19, and 500ha fully irrigated. At the El Monasterio monitor farm in eastern Uruguay, a stocking rate of about four cows per hectare on irrigated land compares with average stocking rates on an irrigated property in Canterbury.
Irrigation development has been delayed by lack of electricity infrastructure and water supply, but the company is targeting about 6000ha of irrigated land by the summer of 2010.
To improve the cash situation, NZS will reduce full year 2009 capital expenditure from the budgeted figure, is selling most of its beef herd to free up land for dairy cows, reducing fertiliser inputs to maintenance levels, and temporarily closing three milking sheds.
