Farmers warned on rising debt

Soaring debt, naive bankers and farmers borrowing on blind faith may have over-hyped business confidence in the farming sector, according to a leading rural banker.

"You should plan for how you would react, given a significant downward shift in confidence," Conrad Wilkshire, the Bank of New Zealand's general manager for agribusiness, told dairy farmers at New Plymouth's Dairy Expo.

"Australia's dairy industry is in much better shape financially to absorb a shock such as an unforeseen biosecurity threat or significant commodity downturn," Wilkshire said.

New Zealand dairy farmers average 54 per cent equity in their properties, compared with Australian farmers who owned 82 per cent of their farms.

New Zealand dairy farmers achieved a much stronger return on capital if capital gains were included, "but there can be no doubt as a sector we are significantly more leveraged".

"Is farm debt the steroid currently fuelling the confidence in the long-term outlook?" he asked the farmers. "I haven't seen too many situations of late where the neighbour's block has been bought with anything less than 100 per cent finance.

"Debt to the farming sector has doubled in the last five years, from $12 billion to $23 billion," Wilkshire said.

The first $12 billion of debt had taken 150 years to accumulate, and Wilkshire questioned whether the $11 billion further debt added over the past five years had inflated business confidence.

He said banks and other lenders also had a generation of staff who had hardly seen a drought let alone a rural downturn, and were often being paid incentives based on approving loans.

But the banking industry was only responding to farmer demand, many of whom had been farming for 20 or 30 years.

"No doubt my peers in the banking industry will be attesting as to the quality of their [loans] book," he said. "The reality is, we haven't had a downturn yet."

Wilkshire said talk had turned recently to a "perfect storm" scenario of a triple-hit - a national production shortfall, a high exchange rate and commodities coming off a cyclical high - as if it could never happen.

Dairy farmers should be taking a hard look at exactly how they would manage a significant drop in business confidence in their sector.

There had been a significant lift in "on-farm" productivity and financial returns over the past decade:

* NZ milk production had doubled to 14 billion litres, according to the most recent (2004) MAF situation and outlook report.

* Production per-cow had risen about 25 per cent.

* There were 5.1 million cows compared with 3.8 million 10 years ago.

But Wilkshire said the payout in inflation-adjusted terms had remained relatively static at $3.79 on a 10-year average.

MAF analysts have predicted that average milk payouts to dairy farmers may slump to $3.11 a kilogram milksolids in the year to June 2006, with Fonterra farmers likely to get only $3.07c/kg.

And MAF said in its situation and outlook forecasts last year "payout is forecast to fall to $3.11/kg milksolids in 2005-06, due mainly to the delayed impact on Fonterra of the current high NZ dollar". If the US dollar exchange rate was higher than expected, the Fonterra payout - minus a 3c/kg industry-good levy - could fall as low as $2.97/kg in 2006.

Farm debt

* Dairy farmers have been warned against over-confidence about the future of the industry.
* Farm debt has soared and left New Zealand farmers in worse financial shape than those across the Tasman.
* A downturn with a high exchange rate and commodities coming off cyclical highs would hit the heavily indebted first.