Imagine being approached with an investment proposal that went something like this: how about you borrow almost $30 billion to invest in something that produces a commodity that swings in price by more than 50 per cent over a two-year cycle?

How about you invest in producing that commodity on the idea that demand has moved structurally higher, but pretty much ignores what other suppliers of that commodity might do?

You would probably be more than a little sceptical.

Yet that was the proposition New Zealand Inc essentially agreed to invest in over the past decade.


This is the story of the dairy boom that has now bust, leaving dairy farmers holding debts of more than $40b and producing a commodity that is losing them $1.6b a year.

Those debts are worth more than three times the income produced by that land and up from just $11.3b as recently as 2003.

The Reserve Bank has forecast that if this week's payout cut to $3.90/kg is extended into next season, and then recovers only slowly, then 44 per cent of those loans would be non-performing.

That doesn't necessarily mean the banks would kick 44 per cent of farmers off their land - but it does mean the banks face profit drops.

No other business leader in any other industry would borrow three times the income to build a business that produced something they couldn't control the price of.

Robert Muldoon was ridiculed and condemned for borrowing and betting big on a continued high price for oil when he invested in petro-chemical plants at Motonui, Waitara and Kapuni, and indirectly on the Clyde Dam and Tiwai Point expansion.

This sort of investment decision makes no sense. Unless, of course, you weren't actually borrowing the money purely to produce cashflow from the sale of that commodity.

It makes perfect sense if you are borrowing money to push up the value of land, the gains from which are tax-free.


Most farmers would vehemently deny they are farming for tax-free capital gains, and most hold their land for multiple decades and often for multiple generations.

But it is simply not credible to say that land value is irrelevant in their decision-making. It's certainly relevant in the decision-making of the banks.

Finance Minister Bill English put it best this week when he said it was time for farmers to be more like proper business investors.

"This is an industry where they've had a focus on growing equity and growing land values for quite a long time now. It's going to be a significant adjustment to getting back to the core business of effective farming for cash flow.

"They are going to see land values drop. That is pretty much certain."

However, the Government can't ignore its role as a cheerleader for the collective investment decision that farmers made over the past decade. It has actively encouraged the massive conversions and intensification of land use of recent years.

And then there's the pesky matter of tax-free capital gains. Not even Labour has suggested farmers should pay tax on capital gains.

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