I did see a useful graph about a year or so ago that showed farm values pretty much tracking their profitability for the last century - except for small deviations caused by Muldoonist interventionism etc. However, the two metrics decoupled about 7-8 years ago, & with values going up to about double that of the related profitability. The conclusion was that profits were going to have to double, or values halve, to bring the two into alignment again. That is consistent with the RBNZ concerns.

If anyone is interested, I can probably still find the graph & supply further information. I think it was in the NBR.

The existing debt is a problem,the main concern I have is the growth in debt.Debt is still growing at %20+ compounding(648 mill in March). If the growth in debt stops farm prices will collapse. Profitability is already difficult to find.
In our local rag a real estate agent said"this is the most difficult time he has experienced in 24 years as a rural sales agent.That buyers are at least %20 below vendors, as bank lending toughens this will worsen.

Let's see what has happened with our bank fueled inflationary cycle.

In ten years farm debt has gone from $11.34 Billion (99) to today $42.6 billion. That's a compound annual growth of 14.2 %. Have we got 14.2% more assets (land and stock) per year? Have we got 14.2% more income per year? Have we got any unit volume increase at all from $3.1 billion of extra debt per year. So where did it go?

Many farmers will go to the wall and I feel very sorry for them. They don't deserve the stupidity of the Governments that allowed this to happen to them (both major parties) . Hardworking YES, Honest YES, Productive YES, Exporters YES, Proud Yes, Now in trouble YES!

So why do we allow the banks to repeatedly fuel inflation in this way. Our monetary policy which focuses on price stability is a) not working and b) is helping cause the non-productive debt increases we have seen in farming and housing. Why these two you may well ask? Because the banks have been willing to lend any amount of money to property based investments and very little to the non-farming sector of the productive economy.

I guess that's why productivity is so low relative to all other OECD countries. I guess that's why farms and houses have to go through a re-pricing exercise taking billions of New Zealanders wealth away in the process.

Bank losses? Well we still have the foreign debt and have to pay the interest till we fold up our tents. The margin gouging going on now is how the banks are going to pay for any materialised losses when they happen so that's coming out of our pack pocket as well.

So well done New Zealand"¦.$31 billion extra in debt, no additional income producing assets or jobs.

I can't wait for the recession to be over so we can start the process all over again. What process you ask"¦.oh that would be selling New Zealand to Australia one brick at a time or in this case one paddock at a time.

Bill English, please fix our useless monetary policy, bring in CGT on property, recapitalize Kiwi Bank, start using Kiwi Bank as a macro-economic tool, put incentives in place to encourage savings and productive investments, start listening to Treasury, the Reserve Bank and the Productive Sector and start acting first and foremost in the interest of New Zealand. This rubbish has to stop and only government can stop it happening.

Chris_J and Andrewj - Has drought been a significant factor in post 2006 debt growth?

Selwyn....

An outstanding piece of writing and perspective.

As the owner of a successful business in the non-farm productive sector, I was turned down numerous times for loans. I eventually took start up capital from family. I have now expanded overseas (Asia) and will eventually transfer all business over there.

I'm afraid the solution you rightly highlight will not transpire as our politicians do not have the brains or balls to do anything about it. When they finally do get it, NZ will be in the hands of others. I don't think this will be Australia but our new masters, the Chindians.

Come to think about it, maybe our politicians don't see this as a problem anyway.

Selwyn.

Bill English should stop listening to Treasury, the Reserve Bank and the Productive Sector. They are all culpable regards the destruction about to befall parts of the dairy industry.

I was pointing out the insanity of agricultural debt and asset values to TSY in 2006. They were receptive until you got to the senior level i.e. those largely responsible - who simply didn't want to know about it.

This link makes it crystal clear that agricultural debt is concentrated, and that for those dairy farmers in the top debt tritile there is no way out now that the asset bubble is deflating:
http://www.agprodecon.org/node/29

Peter R, you'd be surprised what Treasury and Reserve Bank are saying these days. I guess the facts are now so crystal clear they just can't be ignored.

Sally with respect the socialist didn't get the world into this mess. Our version got government debt from 38% (from memory) of GDP to 17.5% of GDP. The last government did get Government debt down but "we" you me and everyone else that bought an inflated house or farm got the National debt up to the 97%? of GDP that it is today. That's a failure of structural policy not socialism.

"¢ In New Zealand Public (or Government) debt to GDP ranks 86 of 126 countries on the CIA web site with a low 22.9 percent est. for 2008 (so Government debt isn't the issue)
"¢ However we rank 20th highest deficient in Price Purchasing Power (PPP) of 192 countries on the same web site
"¢ As a country we are spending 8% more than we earn (our PPP deficit)
"¢ AT this rate we rank 9th fastest in the world at selling our country to foreign banks equal with Croatia and Costa Rica.
"¢ Only Jordan (-16%), Jamaica (-12%) Spain (-11%) Lithuania (-11%) Romania (-10%) and Serba (-9%) are ahead of us.

People this is systemic failure and many administrations starting with Robert Muldon and his Think Big (Debt) can share the glory.

PS I havn't get a chance to check the above data so I reserve the right to be wrong but dont think so.

Selwyn.

People this is systemic failure and many administrations starting with Robert Muldon and his Think Big (Debt) can share the glory.

I agree entirely, but would expand those sharing the glory to include a broad swath of academic and research institutions, various agricultural boards and many service providers to agriculture.

A good recent example of systemic failure is the dairy industry's 10 year strategic plan - it makes no mention of the industry's excessive debt.

Les,
CGT hasn't stopped a huge housing bubble in Australia. A CGT presumes a gain. In a bubble, people will still go for the gain.

Regulating the LVR or other aspects of lending would go some way to preventing the bubble getting out of hand when mania hits.

Getting rid of negative gearing would be beneficial as well. For the cost / benefit to the ATO of negative gearing Vs Rent in Au in 2006 see table 2.5 in this link

http://www.ato.gov.au/content/downloads/00117625_2006CH2PER.pdf

Gee, looks like there is not a lot of benefit to the taxpayer from rental income in AU. In fact its an outright cost to the tax system.

I have looked for similar stats from NZ but with no luck.

Frustrating isn't it? Since June 2008 Andrewj and PeterR have been attempting to properly inform from the sideline (and I believe occasionally getting involved in the actual scrummage) but nobody has been listening.
As far as the worst indebted "tritile" that PeterR describes, I disagree with Selwyn. Greed and poor understanding of farm systems has caused their problem. Banks and "equity partners" have been caught up in the same scramble to expand - all based on poor analysis and short term views that have consistently ignored the glaring risk of high cost production on marginal land and into commodity markets.
The less indebted dairy farmers are those who did better thinking but perhaps received none of the "success story" accolades and will probably soon be subsidising the reckless - along with taxpayers no doubt.
The latest DairyNZ strategy documents show that the culture of capital gain and dubious statistical base upon which to launch projects still thrives. Although the recognition of farm systems is reassuring.
Unfortunately the only certainty is that guys like Andrewj and PeterR will remain on the sidelines while the people who caused the mess continue as usual. The systemic failure that PeterR first mooted February (And now Selwyn too) seems destined to roll all the way down to....... (Not enlightenment for sure).

Junior National Party Associate Finance Minister Rob Muldoon vehemently protested when Holyoake signed NZ up to the IMF in 1961 after going through the election campaign saying they wouldn't. He protested that the conditions imposed upon us in order that be refinanced amounted to a loss of economic sovereignty. He only succumbed when England made it clear they would no longer finance our needs and that the new system was basically the only option available to us. We had an Economic Advisory Council of foreign economists or foreign trained NZ economists inserted as an independent body within our government and handed over 6 million pounds of gold reserves to the IMF.
By the time he took over from Harry Lake as Finance Minister he was forced to borrow heavily to subsidise an agricultural industry facing destruction from the 70s oil shocks and borrow heavily to appease the greedy demands of a Public Service Sector Union who's members made up 25% of the entire NZ workforce, thus could basically dictate who gained power.
Our current account deficit slowly but surely once again grew into a crisis. At which point we were offered another ray of light by our Economic Advisory Council. We should borrow heavily to build import substitution infrastructure, aluminium smelter, steel plant, and petrochemical projects and oil refinery that would make us fuel self sufficient. These plants were built, then when they came online nations with obvious diplomatic ties to the institutions that loaned us the created credit, lifted the tariffs imposed upon the goods we were supposed to export to repay the loans. This was the final nail in the coffin that led to us once again being put in the hands of the international receivers. This resulted in the Roger Douglas fronted international financier "reforms" of 1984, which saw us sell of much of our existing and recently built infrastructure to multinational corporations with connections to those very financiers who had just played the most dirtiest of tricks.
Those people would love to have us continue to blame Rob Muldoon who they put up as a scape goat. The truth was we were being gradually maneuvered into a totally subservient colony of the growing borderless banking empire.
In the 80s "reforms" the Economic Advisory Council became the NZ Debt Management Office in 1988 and is still an independent organisation operating within our government, handling our debt dealings with the outside world.

Farmers and people like Roger Thompson I suspect vote for National like some sort of tribal allegiance because they synonymous with subsidising the agricultural sector. I have news for anyone that supports any government on the basis of subsidies or compensations they receive in the debt based monetary system, you pay them back 2-3 times over out of your taxes, that is if you are one of the basically decent majority that pays them of course.

Gibber - doing something with LVR and -ve gearing would help, agreed. Re. CGT, it's the same arguement used against 'ring-fencing'. "They have it in Auz or UK and it hasn't made a difference to the bubble effect there." Some foundations for bubbles are discussed here, and elsewhere on 'Interest ', and see Hugh Pavletich's work. The reasons for introducing a CGT are not purely about stopping inflationary bubbles, however, the presence of a CGT would likely reduce the intensity, meaning rate of price inflation is reduced, maximum prices attained are reduced, burst point is earlier - all meaning there is not so far to fall from the top for those caught out up there, with all the toxicity that implies.

Given a context difference it may not be so illustrative to ask where would Auz and UK asset prices be without CGT, ring-fencing, stamp-duty? However, as a thought experiment, we could ask what would happen here if we removed the nil-CGT subsidy and introduced and unambiguous CGT tomorrow?

NZ and ag. in particular has dealt with the distorting effects of subsidies before, and come out stronger.

(Not sure the banks will like that though Iain - I find your posts as illuminating as I do frightening - what if you are getting it right? Perhaps we'll be taking the 'mark' sooner than we all think?)

PeterR, I challenged an Agribusiness finance manager some 4 or so years ago about this crazy lending. At the time 4000 stock unit sheep and beef properties were getting to be worth 4 million. His answer was the people who were buying still had upwards of 60 to 70 percent equity, my challenge to him was; how do 4000 stock units pay a mortgage of over a million dollars. The figures work he said.
Sure maybe this year, maybe next, but drought, interest rate rises, poor commodity prices, exchange rate excesses, these things happen and nobody left any fat in the system to cope in bad times. Such as what we have just been through.
This man was a salesman, no more no less. I realized that that day. I trained as a ruralbank lender. Responsibilty was the name of the game when training. In reality you are just selling a product. And the rural community got sucked in big time. By salesmen selling money.

Another instance. At the auction of a small dairy farm about 3 years ago. Bank A was the banker of the vendor. The vendor was rumoured to be in trouble.
The same Bank A goes to the auction with the eventual buyer, encourages him to bid to 6 million dollars. Which was shockingly over priced. Banker A is seen to be encouraging the buyer in the bidding.

One walks away wondering whether the vendor owes Bank A 6 million, and what sort of bonus Banker A gets for lending on the 6 million dollar tiny farm. And now what sort of relationship Banker A has with mr dairy farmer buyer. My guess, Banker A has been moved to another branch, and Mean Mr Banker has been brought in.

Quite agree William having seen freinds fall prey to irresponsible lending..........although no one was holding a gun to their heads.

While on a short term basis this situation looks bad farmers generally are in it for the long haul (we are 4th generation) so in 50 years time our grandchildren will be thinking land was cheap back then.......just like we do looking back at prices paid 50 years ago even though they were expensive at the time.