What New Zealand farmers need to know about average efficient production

You may have heard the term “average efficient production” used in the context of rural property values. This means that the farm in question is managed in an environmentally sustainable way with minimal external input (e.g. external feed supply).

Maintaining average efficient production positively impacts the value of a rural property in the long-term, creating a strong foundation over which infrastructure can be added to grow both profits and value.

What do Kiwi farmers need to know about average efficient production, how does it influences rural property values, and how can you use it to increase the value of your farm?

Average efficient production in context

Let’s say you have a dairy farm in Taranaki. It’s grass based, and you can graze your cows year-round on the grass available. You may need to occasionally buy some supplement in winter as needed, but you can primarily manage your farm year-in and year-out as a self-contained unit. That’s essentially average efficient production.

Now imagine you put meal silos in the dairy shed and increase production by 20% with the input of external feed. It’s a cheap way to increase profits in the short-term, but if you’re relying on feed infrastructure in place of proper grass management then you’re no longer average efficient.

Average efficient production is about maximising farm production using what nature has given you, before you start adding external support or infrastructure on top.

The ease with which farms can achieve average efficiency depends in part on where in New Zealand they’re located. In Taranaki, for example, good soil and consistent rainfall makes for a solid support system for farmers. In the far north or Canterbury, however, droughts and floods create annual challenges, meaning that more external inputs are needed throughout the year for the farm to remain profitable.

Why infrastructure isn’t always the answer

Underlying land values in parts of the country such as Taranaki have been relatively static for more than a decade, meaning that the only viable route to increase equity is debt reduction and increasing production capability.

Now that farming for profit, as opposed to for capital gain, is the norm, there is the tendency to want to increase production through added infrastructure because it increases profits. But this additional infrastructure may only add marginal value to the land.

A dependence on infrastructure and external inputs as a method of increasing farm production comes with a hidden trap: while it may improve gains in the short-term, most infrastructure will have a limited lifespan, at which point a further investment is required to maintain or fully replace these aging assets.

When you’re dealing with soil and grass and animals, you’re dealing with natural systems. A lot of people get caught out thinking it’ll fix things to put in infrastructure, that it’ll be easier. But infrastructure should really be the icing on the cake - they still need to be maximising grass production in the first place, and understand how to work with the natural systems provided. Infrastructure should be more about optimisation than a fix.

Building infrastructure to increase your farm’s profits isn’t a bad thing, but it’s important that you factor in an economic return - not just a hope that someone will pay you for it one day when you sell. If there isn’t a direct financial return from your farm infrastructure, the increase in value will likely be marginal.

The key to sustainably increasing your rural property value

The best thing that farmers can do when looking to increase their property value is to take time to consider their options, and commit to a course of action only when they can be confident that the investment will add real long-term value, and isn’t just a temporary patch.

Every farm is different in how well they can perform average efficiency, and what’s needed to improve their value: the right decision for one won’t necessarily be the solution that works for another. It’s important to make sure that you’re working in step with the size and capability of your farm, not simply copying what has worked for your neighbour.

What you’re looking for is something that works over and above average efficient or grass-based systems - those are the foundation, and any infrastructure or external inputs should be complementing, not detracting from that.

When a valuation can help

When you’re looking for ways to increase the value of your rural property and are actively considering infrastructure, a valuation can be a useful tool to provide a benchmark of the current capital value of your farm.

This benchmark valuation can help you move forward with confidence that the capital you’re spending will be worth it. The rising costs of building materials are shrinking returns on capital infrastructure, meaning without proper planning you could find yourself spending 20% of the value of your farm to increase the value by only 5%.

The market value of a dairy farm is linked to average efficient production, so when a valuation is being done we must work out how much it could be worth with a new manager coming in and running it at average efficient production. Feed infrastructure makes farming easier, but it’s only valuable if you’re adding it over and above an average efficient farm. You need to have everything running right in order to capture the uplift in production and make the most out of it.

For advice and insight on the value of your rural property, get in touch with one of our rural property advisers around New Zealand today.

This article was originally published by TelferYoung