New Zealand dairying growth has been super charged by debt - New Zealand Herald File Photograph
New Zealand dairying growth has been super charged by debt - New Zealand Herald File Photograph
Debt
The dairy boom that supercharged New Zealand's economy was fueled by debt, now that debt marks the industry out as one of our most vulnerable to financial shocks.
New Zealand's agricultural debt has soared by 340 per cent since Fonterra was formed in October 2001.
Since 1990 the agricultural industryhas leveraged up by more than 1000 per cent.
As the sector looks out at an era of more subdued earnings, and as farm prices fall, concerns are growing.
The Government is worried enough that it last month approved legislation which will require farmer creditors – such as banks – to provide mediation to farmers who have defaulted on debt before any enforcement action is taken.
Agriculture Minister Damien O'Connor said the bill was designed to ensure some "balance and fairness for farmers, in a situation where they would otherwise be powerless".
Both Federated Farmers and the banking sector welcomed the move - but it provides a strong indication that both sides are bracing for problems if dairy prices continue to fall.
Federated Farmers dairy chair Chris Lewis says there is no doubt that banks are taking a tougher attitude to bad debts than they did in the past.
"It's a good thing that the Government has done this," says Lewis "But I think if they're not careful they might find this new regulation enacted a lot quicker than they realised."
"They've got to take some responsibility around business confidence and business costs," he says.
Lewis says that even with dairy price holding up at relatively good levels, farmers are being squeezed by rising costs and cashflow issues due to the timing of Fonterra payments.
"On of the biggest problems we have as farmers is we don't get paid for our milk for a very long time and that puts pressure on your overdraft, because everyone else wants to be paid tomorrow."
In the May Financial Stability report the Reserve Bank Governor warned that while most dairy farms are profitable at current prices, about one third of dairy debt is held by farms with high debt to income ratios.
"Many of these farms struggle to make profits and repay debt, despite good milk prices," he wrote. "This is particularly concerning as the costs of the dairy sector may rise in response to longer-term challenges, such as environmental and climate change policies."
Not to mention the risks of a dairy price slumps, falling farm values, and banks that seem to be under a lot more pressure on lending in the current environment.
"On average, these highly indebted farms require a price of $6.20 per kgMS just to break even," the Reserve Bank says.
Fonterra currently forecasts a price range of $6.30 to $6.40 for this season. Its opening 2019/20 forecast is for $6.25 - $7.25 per kgMS.
But commodity prices have been shaky in the past few months. They rose lightly last week after several weeks of steady falls.
Chris Lewis, Federated Farmers Dairy Chairperson. Photo supplied.
"They're definitely getting tougher," Lewis says of the banks.
The banks provided credit for the dairy boom, they helped encourage conversions to dairy, he said.
Now suddenly dairy as out of favour and bankers were chasing other sectors like horticulture.
"Kiwifruit is the new gold and that's going gangbusters over in the Bay of Plenty," he said. "But chasing the latest trend, is that sound banking policy?"
The Reserve Bank's concerns were fair enough, Lewis said.
"It's their job to worry about this stuff."
But ultimately the burden was always going to come back to individual choices.
"If you want to follow that dream and buy your first farm or first house, you've got to pay the market price. And as always, as with my parents generation, you put everything on the line to make that first purchase," he said.
"That means you borrow a lot of money. The principals haven't changed at all. The problem is that the numbers are getting bigger and bigger."
