Report finds tough calls needed over debt in the dairy sector

Debt levels have reached $39 billion, forcing dairy farmers to make some tough decisions.

Dairy farmers need to build resilience and make some tough calls as debt levels reach $39 billion a new report says.

Robobank said its report, Oceania Dairy - Let's Debt Serious, shows the New Zealand dairy sector was exposed to market volatility and dairy farmers need to strengthen their business structures by rebuilding equity in the next price upcycle and further developing flexible production systems that can easily reduce costs when milk prices fall.

Report co-author, dairy analyst Emma Higgins, says the current severe price downturn marks the third trough in the past decade and the sector must plan for inevitable future volatility.

"Tough decisions will need to be made in the next upward cycle. Farmers will need to make a careful and considered decision whether to put some debt to bed or chase a profit margin through increased investment and spending," she said.

"Ultimately, New Zealand dairy farmers need to be the most cost-competitive among their global peers in order to be one step ahead of the price curve - in both good times and bad."

New Zealand dairy debt had steadily increased from $11 billion in 2003 to a current record high of $39 billion, the report said and the industry now accounts for 68 per cent of total agricultural debt.

Ms Higgins said the upward debt trend reflected the expansion of the industry, when improving dairy returns fuelled an improved appetite for land acquisition.

"The expansion can also be partially attributed to New Zealand policy changes introduced in 2010 to provide sufficient liquidity buffers which stimulated credit flows, along with a sustained appetite for lending from some banks."

According to the report, the "average New Zealand dairy farmer" entered the current prolonged downturn highly geared and the average debt per kg/MS remains near record levels at NZD 20/kgMS.

As a comparison, the equivalent Australian (Victoria) dairy farm debt is 65 per cent lower, at around NZD 7/kgMS.

"Debt is a useful tool for generating an effective return on equity along with an opportunity for increasing business growth. Conversely, too much debt can be damaging to the farm business, with little resilience to withstand adverse events," Ms Higgins said.

"For some vulnerable farmers there may be a need to strengthen the balance sheet through alternative sources of equity for future downturns."

Commodity prices up

New Zealand commodity prices rose for a second month in June, led by more seafood and dairy products, although an appreciating Kiwi dollar limited those gains in local currency terms.

The ANZ commodity price index rose 3.7 per cent in June, after a 1.1 per cent increase in May.

On an annual basis, prices were down 5.4 per cent. New Zealand's biggest commodity export - dairy products - has been hampered by low global prices as European and North American farmers produce more.

Prices have recovered somewhat from last year's slump, and NZX futures indicate prices at the upcoming GlobalDairyTrade auction will rise between 3 and 5per cent.