Agribusiness: Big swings in the farming cycle

Some Kiwi dairy businesses face question marks over their long-term viability as the industry heads into its third consecutive season of negative returns. Photo / Getty Images

Westpac's Karen Silk says the bank is confident the problems facing NZ dairy farmers are cyclical.

"We still hold the view that this is a cyclical issue," says Silk, General Manager Commercial, Corporate & Institutional at Westpac NZ. "It's just you've had more extreme swings."

Some Kiwi dairy businesses face question marks over their long-term viability as the industry heads into its third consecutive season of negative returns. Capitalised losses and lower long-term milk price forecasts are reducing the long-term viability of some dairy businesses.

Forecasts based on figures from the Reserve Bank, Westpac, and DairyNZ suggest dairy payouts and livestock sales combined will barely meet operating expenses during 2016 and 2017 for the average dairy farmer.

Serious concern arises when interest costs are added to that equation, putting average dairy farmers well into the red, with a potential shortfall of around $1/kg of milk solids. With milk price forecasts remaining low it is predicted that profitability will be depressed for some time into the future.

Westpac estimates suggest that even in a "high milk price" scenario, the average farmer will fail to achieve a positive cumulative cash position before the 2020 financial year. Under "medium milk price" scenarios, the position is negative in all financial years projected to 2020.

This situation is beginning to filter through to land values. Real Estate Institute of New Zealand figures from June saw the median price per hectare for dairy farms down more than 8 per cent over the previous 12 months. Farm equity levels will continue to come under pressure, which may push leveraged properties in "fringe" areas to market. Despite that, the stagnating of land values could be a shift that is more structural - and may have stabilising effects.

Questions Silk: "Do property values just start to go sideways for a lengthy period? And is it a correction in income over time that actually improves the LVR position?'

Another dynamic that banks are monitoring is the divergence between financial conditions for North and South Island farms.

North Island farms typically operate on lower cost models and are less leveraged than their South Island counterparts. In the South, the conversion to dairy farming has generally occurred more recently and farming units are larger. High-cost irrigation systems are often necessary.

These factors result in higher operational costs and debt servicing costs for southern farms. Dairy farms in Canterbury and Southland are responding by reducing stocking by a quarter to half a cow per hectare overall.

"There's clear evidence where there was a lot of concentrated farming going on - in Southland for example - they're reducing that kind of intensification," says Mark Steed, head of agribusiness at Westpac.

On-farm wintering is becoming popular: a process whereby a portion of the herd is kept on the farm during winter while winter crops are farmed - as opposed to the usual transfer of the herd to an entirely different block.

To offset costs, farmers have frequently substituted themselves for labour and partners have brought in off-farm income through other jobs.

They have also resorted to using scale and technology to improve yields.

Westpac says the bank is "committed to the sector for the long term".

All its agribusiness customers remain on minimum 90-day call programmes with many dairy customers on monthly visits.