Dairy farmers need to reconsider 'smart level' of debt - Federated Farmers chair

Dairy sector borrowing is expected to rise in coming months as farm incomes fall during winter. Photo / Michael Cunningham

Dairy farmers need to ask themselves what a smart level of debt is given the risk profile for the next decade is likely to be different than the last, says Federated Farmers Dairy chairman Andrew Hoggard.

Compared to other countries New Zealand has a very high debt level on its dairy farms, Hoggard said at the dairy industry group's annual meeting. There were several factors for that, including in many cases farmers in other countries haven't been able to expand because of regulations and therefore haven't needed to borrow. Or they have had volatility from other factors such as weather in Australia which means they focus on managing that and carry less debt, he said.

"Whether it's a conscious decision or just an inbuilt setting that no one has considered and just occurs, I can't tell you," Hoggard said. "But the facts are they have less debt."

In 2015 New Zealand dairy industry debt stood at $37.8 billion, up from $30 billion five years ago.

Hoggard said the industry had been able to handle higher debt levels because returns were good and weather conditions are by-and-large okay which allows farmers to take more risk in other parts of their business.

"Is this current downturn just a blip or are we entering a new period?" he said. "Things might look slightly different than the last decade and our risk profile might be slightly different than the last decade."

The latest Reserve Bank Financial Stability report showed low milk prices continue to put the dairy sector under material stress with bank lending to farmers increasing by more than 9 per cent in the year to March, as troubled farmers have borrowed to meet working capital requirements.

The report said debt relative to trend income had increased significantly and is likely to exceed its previous peak of 350 per cent if incomes remain subdued and indebtedness continues to rise.

Dairy sector borrowing is expected to rise further in coming months as farm incomes fall during winter and many farmers now face a third season of negative cash flow. Problem loan levels are expected to increase significantly over the coming year, although losses in the banking sector are likely to be absorbed mainly with profits, the bank said.

Some heavily indebted farms with high break-even payouts may face tighter constraints on their borrowing capacity and pressure to reduce costs further, it said. In a recent Reserve Bank stress test of bank dairy portfolios under the most severe scenario banks reported they expected to resolve around a quarter of dairy loans through some form of forced sale which would lead to further downward pressure on farm values, which have dropped 13 percent in the past year.

Things might look slightly different than the last decade and our risk profile might be slightly different than the last decade.

Hoggard said it was up in the air what the fall-out for New Zealand dairy might be from Brexit, given New Zealand's dairy exports to the UK are pretty minimal.

"Whilst we have quota, the tariff rates do make it uncompetitive against cheaper imports from Ireland and the Netherlands. If we are able to quickly organise trading terms with the UK that are at the same level as the EU, then we certainly have a good opportunity," he said.

Under World Trade Organisation rules existing agreed access can't be downgraded.

On the downside, New Zealand has lost an ally around the European Union table in negotiating a free trade agreement with the EU and the global uncertainty may have a negative impact on demand, he said.

Hoggard also waded into the debate on swimmability of New Zealand's rivers "just to keep the keyboard warriors happy".

He said the discussion focuses on irrigated dairy farms being the reason why so few of our waterways are swimmable but never mentions anything else. The focus needs to be on defining swimmable or what are the actual factors influencing swimmability in each waterway.

E-Coli levels should be the focus if the key thing is to be physically safe and not get sick when swimming in a waterway, however the discussion seems to indicate "we're all going to die from nitrogen poisoning," he said. "Dairy farming cops a lot of blame for everything but on the E-Coli front I think we have already done heaps to reduce the impact."

In Hoggard's own region, the Manawatu River has 51 monitoring sites and only one of them shows a site over a count of 550 which requires action and that site is at the Woodville sewage treatment plant.