Fran O'Sullivan: Govt needs to show leadership on dairy

Dairy farming is staring at its own version of the sub-prime mortgage crisis. Photo / Brett Phibbs

When is the Government going to take some leadership and set up an action-oriented task force to combat the dire situation facing New Zealand's largest export industry - the dairy sector?

It is abundantly obvious that the "white gold rush" that spawned the conversion of vast tracts of New Zealand forestry and cropping land to dairy farms is over. The oft-repeated claims by industry giant Fonterra that milk powder prices are on the recovery path has been exposed as hallucinatory (at best).

Other Governments elsewhere are already dishing out export subsidies to keep their dairy farmers going (think the European Union and the United States). But alarmingly, the latest reports out of Europe suggest the European Commission may soon consider legislation to allow its member states to provide interest-free loans or direct payments to their own debt-stressed farmers.

If this goes ahead, it will no doubt spark another round of tit-for-tat protectionism - and may also act as a lengthy price dampener.

The Government from the Prime Minister down continues to talk up the long-term prospects for the NZ dairy industry. But it's the short-to-medium term outlook that should by now be ringing alarm bells within the Beehive.

New Zealand farmers long ago embraced the free market ethos. But as the protectionist bandwagon rolls even faster there must surely come a point when Government leadership is required. New Zealand should not - and will not - go down the subsidy path again.

But there is an argument which suggests it may be fast approaching the time when the Government steps in to broker a deal with the more exposed parts of the dairy sector - and their bankers - to manage out the more marginal loss-making farmers in a fashion which does not send land prices into complete freefall.

Or a deal where the banks - who after all went a little crazy themselves with boom-time lending - would contribute to a financial restructuring of the exposed parts of the sector, by forgiving an element of the loans or reducing interest rates - so that dedicated farmers can hunker down until the international market recovers.

What I am suggesting is not a full-blown statutory management. That worked well in the late 1980s when the then Government put loss-making companies like Chase Corporation and DFC into statutory management allowing assets to be disposed of in an orderly fashion so that the commercial property market did not completely collapse.

But some sort of broker-driven arrangement that allows creditor claims (aka bank loans) to be compromised so that a valuable sector (in the long term) can keep producing short-term.

Right now New Zealand's most valuable (long-term) industry is staring at its own (smaller) version of the sub-prime mortgage crisis as bankers begin to run the ruler over many of the newer more marginal farmers - or those that expanded large to cash in on the dairy boom - who are not only having to carry forward significant financial losses due to lower dairy payouts, but also face a potential shock if land prices slump back to pre-boom levels.

Even the Reserve Bank has been warning that trading banks need to prepare for an extended period in which farm incomes will remain relatively low.

"Prompt action to carefully manage exposures to financially stressed farms is likely to be necessary."

Loans to agriculture now accounted for 15 per cent of total bank lending in New Zealand, up from 10 per cent earlier this decade, its recent financial stability report said. The central bank acknowledged trading banks were helping rural borrowers through a period of weaker returns. But it also acknowledged that some of the more highly leveraged farms were having difficulty servicing debt.

The Government may opt for a "do nothing" approach. Rather like the ruthless approach its Labour predecessors took to the collapse of the finance company sector; some of which have since been exposed as having been run like private banks by businessmen who are little more than charlatans.

Regulators such as the Securities Commission, the Registrar of Companies and even the NZX stood by while the sector went into free fall arguing they had no over-arching responsibilities. There was little evidence of substantial investigative input ahead of the finance companies crash.

But this Government can take some leadership. South Korea, for instance, has required its major banks to provide authorities with a list of exposures to major companies. Korea is now endeavouring to manage out marginal players in its internationally competitive industries and concentrate resources on more substantial companies.

This is another option that could be followed here by paving the way for "corporate farms" to gobble up the marginal players. If nothing happens, the sector faces the prospect that the really debt-ridden farmers simply walk off their land.

In early May, the Prime Minister told the dairy sector his Government was "right behind" it as it charted a course for the future.

On the Key Government's programme was work to remove barriers to free trade, support for primary sector research and development, the reduction of red tape, developing critical infrastructure and supporting rural communities.

But right now other prime dairy exporting nations like Ireland and other parts of the European Union, and the United States are all pointing the finger at dairy monolith Fonterra claiming its auction system is driving prices down. Fonterra disputes their claims by saying their support mechanisms are the real cause of the diminishing prices.

The point is New Zealand is stuck in an international blame game which our farmers' competitors are playing for all it's worth. Do we continue to ignore this reality - or examine what - short of protectionism - can be done to salvage the industry's long-term future.