KEY POINTS:
Times are great for dairying, and sheep and beef farmers strapped for cash may be tempted to jump the fence and join the milking shed fraternity, but it's not a simple task.
Farmers are being advised to watch their pennies against a backdrop of widely differing scenarios.
On one side of the boundary fence the dairy farmer or investor converting land to dairying is being warned not to get carried away with the hype and prospect of riches from healthy milk prices.
On the other side, asset-rich but cash-poor sheep and beef farmers are tightening their belts as incomes shrink for the third successive year.
Taieri dairy farmer Denis Aitken is bemused by the hype, saying the figures do not add up, even with Fonterra's prediction of a $5.53 a kilogram payout this season.
In 2001-02 dairy farmers were paid $5.33/kg but he estimates his costs have increased 17 per cent since then, while the payout in intervening years has averaged $4.20/kg.
Last month, fertiliser prices rose by up to 24 per cent while Fonterra's fair value share, which suppliers must own in equivalence to the milk they produce, increases each year and has reached $6.79/kg of milk solids.
"I don't see why people are getting all hyped up about it," Aitken said.
That hype is driving up the industry's cost structure, with southern dairy land prices rising more than 6 per cent in the past 10 weeks and dairy cows now costing $500 more than they were a year ago.
Dairy farms that sold for $17 to $18/kg of milk solids in 2001 now sell for $23 to $30/kg.
Jim Lee, CEO of dairy consultants Farm Right, said he hoped farmers would use the money to retire debt.
Waikato consultant Peter Floyd is worried farmers could be converting farms without a proper financial analysis. "Banks are making plenty of cash available for conversions and expansion, but investment decisions are being made on the basis of historical tax accounting figures and best guesses."
Floyd is concerned that 70 per cent of dairy farmers made a book loss last season, yet less than 12 months later many were expanding their business.
Balclutha farm accountant Jim Johnstone said that unlike the restructuring of the 1980s and 1990s, sheep and beef farmers this time have the benefit of greater equity through higher land prices.
Despite two years of low lamb prices he has clients who will make a profit, but they tend to have low-debt or low-cost structures.
Johnstone said that in earlier downturns farmers cut all spending including inputs such as fertiliser but were unable to ramp up production when product prices improved.
Many will strategically cut back on big-ticket items such as fertiliser this time, but should be in a position for when meat prices increase in two to three years, as is widely expected.
Farm working expenses have fallen in recent years from $46 to $47 a stock unit to $43 to $44.
Johnstone said a key area that needed to be addressed was the structure of the meat industry.
"I think the independent review [on PPCS and Alliance working closer together] by PricewaterhouseCoopers and where the industry is going is a far bigger issue than issues in the short term, which are exchange rate and interest rate related."
Increasing exports is the only controllable answer to the meat sector's immediate problems and Meat and Wool New Zealand has diverted levy money to lamb promotion in Germany, France and North America and for beef in Asia.
It is now widely accepted that co-operating to improve market prices and returns to farmers is where the future of the meat industry lies.
- Otago Daily Times
