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Exploring farm debt
The financial rules have changed in today's economic environment.
In the past farmers borrowed on their equity, and the ability to repay debt was often a low priority.
The huge sums borrowed for dairy conversions have been on the promise of large lifts in production earnings, but often at the expense of big increases in costs.
Risk factors in a now failing land market are being exposed. Farm income historically has been cyclical and volatile in values, and better financial planning is needed for when prices fall.
Successful operators in the future may well fall into only two categories; very conservative, or top financial managers with flexibility to follow a consumer focus.
Farm debt was the central theme at one of the many recent Beef & Lamb NZ seminars being run throughout the country reports Rural News.
Rob Macnab of Rural Business Solutions presented some sobering figures for those thinking about taking the plunge and converting to dairying.
Macnab outlined data showing farm borrowing rising from around $13 billion in 2001 to $47 billion in January this year, much of it attributable to dairy conversions.
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“Do you as sheep and beef farmers realise that your debt has increased by 46% per farm between 2004 and 2008? Farm debt currently exceeds 400% of total agricultural GDP, with 20% of sheep and beef farmers responsible for 64% of your share.”
For those considering dairy conversions, Reserve Bank data shows dairy borrowings, based on a payout of $5.50/kgMS, in some cases had reached a cost of over $100/kgMS.
Macnab detailed the new debt servicing environment in today’s volatile economic climate – it needs to be based on a realistic operating budget, principal and interest payments have returned, and a factor called ‘interest cover’ now prevails.
This term is defined as the ratio of profits before tax and interest to interest payments. Macnab’s data demonstrates that agriculture’s interest cover has – over the last decade – never risen above a ratio of 2, compared with say wholesale and construction which has reached ratios of 11 and 13.
While rising product prices could help farm finances, farmers should remember that input costs would rise alongside these as always, banks would place heavier emphasis on risk margins, and interest rates would rise accordingly.
18 Comments
Its all part off the Ponzi
Its all part off the Ponzi scheme. Try and find a regestered land valuer that will do a farm valuation for the IRD at a return based on its production returns, they just will not do it.
On smaller properties say 50-80 hectares they will not value it as a stand alone property its based on what its worth to a neighbour to tack on to his property.
You will find a varst majority of land valuers have invested interest in keeping the value high i.e big clients that have paid to much for their property or they personally also have interest in land in the area.
Go into any area in NZ and see how many farmers sons or daughters that really want to carry on the family farm have a fair crack at taking over the family farm especially if they have a lot of brothers or sisters as it has to be valued for the IRD purposes as a related party sale (if their parent or parent is still alive) based not on its productive value buts its bull shit value. Bull shit in this case means capitial gains value.
Lets get back to productive farming based on its returns not precived capital gains.
"bullshit value" ...oh you
"bullshit value" ...oh you have that right winnie...only the farmers who told the banks to shove their credit where the sun never shines will be harvesting the good returns and salting away the capital...the rest are now serfs to the banks.
The debt spiral it’s
The debt spiral it’s happening, when the majority of the farming community is sucked up by a few greedy combine harvesters. What an economy ?
..no different to the housing
..no different to the housing market, the chickens are coming home to roost. A $7.00 payout for this year, but next year $6.00, not good.
.Same problems as residential, over valued for their true return.
The fall of SCF is going to highlight a lot of problems in the rural sector, particularly in the dairying areas of the south.
I hope you are not banking on
I hope you are not banking on a $7 payout this year rayzzor. If you really believe that you have your head in the sand. $6 is a good payout - to the majority of dairy farmers, but there is a portion for whom the bells may toll at that price. I agree - it is no different to the housing market and I hope SCF are allowed to fail and if that means Dairy Holdings goes down, then so be it.
S Shagger, I agree, there are a lot (like the majority) of farmers both sheep and dairy who are doing 'ok' to 'very well thankyou'. But we aren't newsworthy. Only bad news sells and from that the public perceptions are formed.
"With 20% of sheep and beef
"With 20% of sheep and beef farmers responsible for 64% of your share" Read 80% at no or moderate debt levels likely to be reaping quite a nice wee income this year going by the strong market priceing we are seeing looking towards this season. Im sick of all the manufactured "crisis" headlines churned out with sights set firmly in the rear view mirror.
I think you might be right on
I think you might be right on the income side shagger, but one good year dosn't make a multi million dollar farm. It will be the farm prices that will take a hammering, even if farm incomes continue to increase. The crisis lies with those in debt and their lenders, other farmers will only see farm values fall, but wow what a great increase on ROC! ;)
i agree with sheep shagger .
i agree with sheep shagger . i didnt expand and my wife works so the prices now for sheep and a bit of winter grazing make for a nice income
as for the debt i imagine it was a few wannabes that took most of it so am watching with interest when a few marginal conversions hit the wall
Surely the main issue is the
Surely the main issue is the ability to service ones debts. I would imagine prices for all products will be north of bank imposed budget levels so for all but the most highly leveraged(Craferesque) or incompetent operators most should be fine. Move along please no crisis here!
sold Dairy Farm to a 100%
sold Dairy Farm to a 100% debt funded empire buider at the end of the 07/08 season for the highest per/ha and per/ms price ever paid in the district.No skill of my own,just a markey driven by easy credit and stupid decision making.
Plan to buy it back shortly for half what I sold it for. Dairy Farming looking like a better decision all the time.
The rest of the people in the
The rest of the people in the country you greedy dairy farmer scumbags are destroying disagree.
oh well never mind!!
oh well never mind!!
Good on you RJ ... wish there
Good on you RJ ... wish there were more as astute - trouble is NZ'ers priced and regulated beyond family farmer units, filling out ACC forms, IRD forms, OSH reports, Council compliance costs, then there's carbon tax's, RMA, snotty lifestylers next door that can't mend a fence and so on.
Little use in handing down the farm anymore while the ROC was so poor.
Now the public don't want overseas ownership when the Govt has effectively regulated farming to corporate only scale - city people would never work as hard as the average family dairy/drystock farmer of old anyway - so they have no right to say anything in regard to this issue.
The smart will survive and prosper the greedy are about to "get theirs" and those people like you with cash waiting for the right opportunity - all I can say is congratulations and good for you.
the corporitization of Dairy
the corporitization of Dairy farming has ruined what was a good honest hardworking life with worthwhile rewards. As a forestor you know all about what the big firms are all about.
Your referrence to
Your referrence to "manufactured crisis" is the main game sheep shagger. The plot is already enacted. The alledged white knight is a groupie that has been funded with tax payer funds. I thought that they were part of the problem as they reigned surpreme in the recent failed era. Never mind, they have been reinvented so their failures do not count????? Who carried out the due diligence??? Perhaps somebody from Mars!!!
The sad truth is that we
The sad truth is that we cannot blame city or country folks directions for the position we are now all in. We can only blame ourselves for blindly following and accepting the direction we have been steered in.
Small business was the backbone of NZ. Then we got convinced that we had too many small enterprises and middlemen that inflated costs to the buyer and reduced values paid to producers......
So we got Woolworths and Warehouse plus Fonterra and Zespri. Shit, hasn't life been great since then! Aren't we all so much better off?
After that we removed the life savings of our retirees and plenty of others via finance company collapses. They couldn't earn a dollar by starting their own small productive business because compliance costs rooted that consideration. So just put your bucks into a place that invests in people that dont stand a chance within the same parameters.....
You cannot even start a homestay these days to give yourself a scant income. That could possibly provide some downstream revenues for builders and subbies BUT first you face RMA costs that would destroy your first five years income. So back to funds in the bank.... are not gonna see any change. More likely we will see Winston back and with power....but still the same old shit... More power to bankers and big business.n all the unemployed people through that t
wonder what muldoon would
wonder what muldoon would think of all this
He'd have told them to think
He'd have told them to think bigger......