Around 60% of shareholding farms could receive a windfall if Fonterra sells its most recognised brands to French giant Lactalis in a proposed $4.2 billion deal. Photo / RNZ
By Susan Edmunds of RNZ
Retailers in rural New Zealand could be set for a boost if farmers vote today to go ahead with the sale of Fonterra’s consumer businesses to France’s Lactalis.
ASB economists earlier said the deal was expected to deliver a tax-free capital return of about $3.2 billion to 8000 shareholding farms throughout New Zealand.
“The average return [to shareholders] would be around $392,000 if the sale goes ahead, and we estimate around 60% of shareholding farms could receive at least $200,000,” ASB chief economist Nick Tuffley said.
But what will they do with it?
Mike Jones, chief economist at BNZ, said the extra cash flow for farmers would give them options.
“I think we will see a mix of retiring debt, addressing deferred maintenance, probably having a good look at expansion, whether it’s extra land or herd size… and probably a bit of a smattering of discretionary spending in there as well.
“But overall, I think it’s probably going to depend on the age and stage of the participants receiving the money.”
He said farmers were likely to be prudent.
“It’s not going to all go on gold-plated utes and tractors.”
But he said, in combination with strong conditions in the primary export sector generally, it was likely to be a boost.
“We’re just starting to see some evidence of a little bit of extra spending and investment.
“If you look at things like farm sales, tractors, fertiliser imports, rural building consents, all of those areas are starting to show a little bit of growth just in the last two or three months, that wasn’t there before.
“You wouldn’t say things are roaring away by any means, but there’s definitely some growth that’s coming through.
“And I think kind of that in collaboration with lower interest rates, doing their work as they do throughout the economy is certainly going to help us.”
He said a lot of the money was likely to stay in the regions.
Economist Cameron Bagrie said he expected more spending than debt repayment.
“If you look at the $3.2 billion, it’s going to get ploughed into the economy in some shape or form.
“That’s about 0.7% of GDP.
“So, if you’re talking about a sizable injection that’s going to hit rural New Zealand, then that will proliferate through to the city centres as well.”
He said tractor sales were already up 13% on a year earlier, and that sort of import activity helped boost port cities.
There were many factors working for farmers, he said, such as the lower New Zealand dollar, higher commodity prices and higher payout.
“It looks like the icing on the cake will be subject to approval, this $3.2 billion, which is going to get redeployed into farmers.”
He said there was more optimism in rural New Zealand than in other parts of the country.
“Auckland in particular is really struggling.”
But Infometrics chief forecaster Gareth Kiernan said farmers were notoriously conservative about spending, so it was likely many would prioritise debt repayment.
“It’s a capital payment effectively, rather than an income payment, I’d expect them to probably be cognisant of that, and any spending they do undertake is probably going to be more in that sort of capital area rather than rushing off down to the shops to buy a new lounge suite.”
But he said it would help lift activity.
“Give it 12 months, 18 months, I think it does help add a bit of momentum to those provincial economies because some of that capex will flow through into more economic activity.
“But you’re pretty muted in the first instance, and I think it will be selective spending.”
Kiernan said the provincial economy should help to improve New Zealand’s overall economic outlook into next year.
“We have been watching the trends in dairy prices and, to a lesser extent, horticulture prices, over the last probably four months now or so, and they just have been softening a bit.
“They’re still at good levels, but there’s a little bit of caution around that.
“But the fact they’re still high does suggest to us that there will still be money flowing through the provinces.”
CoreLogic chief property economist Kelvin Davidson said it was hard to say whether it would mean a boost for activity in the property market, such as in demand for holiday homes in areas adjacent to farming regions.
“I think some farmers are likely to buy property, but others will no doubt pay down some debt, or buy plant and equipment.
“I know anecdotally that farmers in Southland, for example, have currently got much bigger fish to fry in terms of ensuring consistent milk production without power, and any extra cash they might have may well go to storm clean-up.”
- RNZ