Milk, the new outlook for property investors

With a litre of milk now more expensive than a litre of petrol, the price of dairy farming land is increasing making it a different kind of option for property investors.

It's all down to the Chinese. Traditionally, Chinese diets have not called for a large amount of dairy products, but increasing Western influence is having a significant effect. In the past eight years the country's demand for milk has tripled.

China's Prime Minister Wen Jiabao has said that he hopes to eventually have a half litre of milk per Chinese child per day. Approximately 267 million of China's residents are under the age of 14, which would amount to a minimum of 133.5 million litres (approximately 35 million gallons) of milk per day for children alone in China. If Jiabao's desire is realized, this could potentially raise the global value of milk even higher.

'There is a growing belief that the global demand for dairy products will exceed supply for some time, keeping prices strong,' said Richard Bourne, marketing manager of Roger Dickie New Zealand Limited (RDNZ), a New Zealand-based farm, forest and property investment firm.

He points to New Zealand as the obvious place to start looking for an investment as it is the world's largest dairy exporter. But there are also opportunities in the US, South America and parts of Europe.

There is red tape. For example, foreigners looking to invest in the New Zealand dairy industry need to receive approval from the country's Overseas Investment Office (OIO). Investors can choose to have sole ownership of a farm or to share the investment with multiple investors for a smaller financial risk. Successful, debt-free dairy farms in New Zealand should return 6 to 8 percent annually, according to Bourne.

In May 2007 the US was a net dairy exporter for the first time in memory. California, Wisconsin, New York, Pennsylvania, Minnesota and Idaho are the top six dairy producing states. Some states, such as Wisconsin and South Carolina, offer dairy investment tax credits. Investors should look into possible tax incentives in the state in which they want to invest.

Several factors need to be taken into account when evaluating a potential dairy farm investment. When RDZN scouts for dairy farm investments, it tends to prefer farms that are underperforming and can be improved, Bourne said, so investors may wish to follow this strategy.

Investors will also need to evaluate not only the farm's location, but also the local climate, soil type, water supply and the potential environmental impact a dairy farm will have on the area.