Why is Harvey Norman Going in to the Dairy Farming Business?

This morning, retailer Harvey Norman [ASX:HVN] announced an unusual new acquisition.

HVN’s wholly owned subsidiary has bought a farm. A dairy farm, to be specific.

Harvey Norman now has a 49.9% share in Coomboona Holdings Pty Ltd. They will pay $25 million. $9 million upfront, as an advance.

Coomboona owns land and dairy farm assets in the Goulburn Valley, in northern Victoria. In addition to dairy farming, Coomboona has a breeding and genetics business. They breed Holsteins. You know, the black and white cows you see gracing the front of milk cartons everywhere.

Coomboona is already successful. But it’s growing even more. In March this year, the local council (Greater Shepparton) approved Coomboona Holsteins’ application to more than double the size of their operations. They’re now allowed 4,800 cows, up from 2,200. It’s now considered an intensive operation. The council said that intensive farming is becoming common. They overruled neighbours’ objections about noise, smell, and waste.

A local newspaper first reported HVN boss Gerry Harvey’s involvement back in June.

But why dairy? Well, it’s an attractive option for a number of organisations chasing opportunity overseas. Aussie dairy products, and beef, are incredibly popular amongst Chinese consumers. Export values and volumes are growing strongly. And Harvey Norman is far from the only one to notice.

In late April, the Moxey and Perich dairy farming families made a deal with New Hope Dairy Holdings and Freedom Foods [ASX:FNP]. New Hope Dairy is a privately owned Chinese company. And FNP is a local, trying to establish themselves as a leader in food exports to China.

Last month, Chinese billionaire Ma Xingfa bought two cattle stations in the north. One in the Northern Territory, and one in Queensland. For a total of $47 million. Earlier in the year, the sales of beef cattle operations in the North also made headlines. And in the lead-up to its float, Beston Global Food [ASX:BFC]  secured a number of dairy farms in South Australia.

Coomboona already has ties to China. They’ve been marketing Holstein genetics to Chinese operations for a couple of years.

Source: coomboona.com
[Click to enlarge]

Still, not much is known about the farm. Or about its owner, Alex Arena, who is based in Hong Kong. But Arena has long known that China would be the way forward for Aussie dairy. In a 2013 interview with Holstein International, he said ‘From my experiences in the region it became clear that Australia has a huge opportunity as a major food producer for the Asian market. … As living standards rise, the demand for animal proteins, especially dairy products, will continue to see explosive growth.’ At the time, he indicated that he’d want up to 6,000 cows on the property. ‘We are looking at what the needs for Asia will be in another 5 to 10 years. They will want livestock that are the best the world has to offer, and we plan to be geared to supply that,’ said Arena. It seems that, with HVN’s involvement, they’re going in to the next phase of that medium term plan.

Apart from being mostly based in Victoria, many dairy companies chasing Chinese sales have one thing in common. That is, they’re small-caps. Even dairy brands that are household names are valued at under $700 million. With new export opportunities, including those due to the China free trade agreement, they’ll have plenty of room to grow.

If you want to prepare yourself to take advantage of the best ag export small-cap opportunities, don’t miss Sam Volkering’s report. It’s titled ‘The At Home Investors Guide to Profiting from Australian Small-Caps’. In this report, Sam reveals his simple four step guide to small-cap success. One of Sam’s tips is to thoroughly research the industry and really make sure you know the business. With the dairy industry, there are lots of ways you can do this. For example, you could visit a city agricultural show and chat to some farmers. Or check out a Field Day in a dairy farming region. The upcoming Elmore field day covers the area around Coomboona, as well as several other prominent farms. In January 2016, you can check out International Dairy Week, also just outside of Shepparton.

HVN shareholders may have to wait a while to see what comes of the company’s latest acquisition. In the meantime, don’t forget to find out how to download your free copy of ‘The At Home Investors Guide’.

Eva Mellors
Contributor, Money Morning

Money Morning Australia