Bankers muscling in for a big slice of record dairy payout?

Latest milk payout forecasts will mean $47 billion for the New Zealand economy. Photo / File

Forget new tractor and car dealers - bankers are heading the queue to relieve dairy farmers of large chunks of their forecast record milk payout, says a sector specialist who's concerned some bankers have "lost touch" during Covid.

Nigel McWilliam, a dairying specialist accountant and director at Morrinsville's MBS Advisors, said banks need to be realistic and mindful of farmer wellbeing when setting timeframes for repayment of "big chunks" of principal.

While it's general sector opinion that dairy farmers will prioritise debt repayment with their forecast $9-plus/kg record milk payout this season, escalating costs and rising interest rates mean that $9 prospect will likely represent $7 for the average dairy farmer, say farming sector leaders.

McWilliam said bankers are pushing for more principal repayment and shortening the terms of loans.

"Rather than 50c repayment, they're saying 'let's have $1 back'. Let's not put too much heat on our people given the pressures some are under - with the labour shortage they're working big hours.

"They need to be rewarded for that rather than banks stripping every coin out not realising the workloads some are under."

Industry good organisation DairyNZ said at the forecast payment prices, the profit margin for farmers is $3.80/kg.

Average profit per hectare will be $4256, said DairyNZ principal economist Graeme Doole. These numbers did not include debt repayment.

At milk price-setter Fonterra's latest forecast payment, dairy would contribute around $47 billion to the New Zealand economy in 2021-2022, up from $37b in 2020-2021, Doole said.

Fonterra's latest forecast range is $8.90-$9.50/kg milksolids.

Four key farming costs have experienced inflation of more than 10 per cent between 2019 and 2021, DairyNZ said. Fertiliser has gone up 15.9 per cent, cultivation, harvesting and animal feed by 18.9 per cent, and electricity by 21 per cent. Stock grazing costs are nearly 37 per cent higher. Dairy farm wages and salaries have increased 3.9 per cent.

McWilliam said from conversations with banks on behalf of clients, he was aware "a lot of new bankers have come into the game in the last two years".

"They haven't had the experience of client contact because they haven't done (farm) visits (due to Covid). It's quite evident from some of their behaviour they've lost a bit of touch with what's happening on the ground.

"They also haven't had experience with seeing how economic cycles play out. I don't want to have conversations that 'in hindsight we could have done something better'. We need good decisions now."

Nigel McWilliam, dairying specialist accountant and director at MBS Advisors. Photo / Supplied

McWilliam said with overall agriculture debt at around $63 billion, and housing debt at around $320b, the risk to banks was not agriculture.

"They need to lay off the agri-business stuff in asking for capital back ... I've said don't risk-price farming through the roof. We've already seen interest rates of 6 per cent for five years - for farming that's unrealistic.

"We need to be mindful not to hit agri(culture) - it's the only sector holding this country together economically. It's probably one of the only sectors that will pay provisional tax and will continue to. We need to look after those on the land."

The Herald approached ANZ Bank, New Zealand's biggest rural lender, to respond to McWilliam's concerns about bankers. (ANZ on Tuesday lifted its milk payout for 2021-2022 to $9.30/kg.)

In a written statement, ANZ managing director, business, Lorraine Mapu said in this new time of rising interest rates and cost inflation, farmers needed to continue their focus on building strong businesses, "with stronger earnings, more flexibility and consider more diversification".

As a rural community supporter for more than 150 years, the bank needed "to look through cycles and understand what it's going to take to ensure our farming businesses will be around for the next 100 years".

"We're mindful of the particular challenges New Zealand's dairy industry faces and we're proud of the work done by the sector on reducing its debt over the past decade. During the dairy downturn in 2014 and 2015, farmers who continued with debt repayments and smart on-farm investments came through in good shape."

Mapu said the bank had encouraged farmers to either pay down debt or invest in productive revenue streams.

In the past 12 months more than $1 billion in debt had been paid off.

McWilliam said his firm was financial planning on the basis of a $8.84/kg cashflow payout for clients this financial year.

This was an "excellent" result, but costs escalation had been significant this year with some fertiliser costs doubling.

Clients were being advised to consider one and two year interest rate terms, instead of the longer term splits advocated before. They had also been steered away from signing up to fixed milk pricing schemes.

While a dairy product supply shortage is driving up the world prices that are boosting farmer milk payment, lower production is a two-edged sword.

In New Zealand, national milk production is currently down 3 per cent on last year.