English says possible bank losses on dairy debt not a threat to financial stability; says Government won't bail out dairy farmers; says competition best way to sort out banks not passing on OCR cuts; Little says 'stiff-arm' the banks on dairy debt

English says possible bank losses on dairy debt not a threat to financial stability; says Government won't bail out dairy farmers; says competition best way to sort out banks not passing on OCR cuts; Little says 'stiff-arm' the banks on dairy debt

By Bernard Hickey

Finance Minister Bill English has rejected calls for some sort of Government bailout of the dairy industry or the need for a crisis summit.

English said the scale of any losses for banks on the dairy debt was not enough to endanger financial stability and there were already plenty of meetings going on between farmers, bankers and their respective representatives.

"If the Opposition want to support the dairy industry, they should vote for the TPP and the changes in the RMA. That would mean more than some talk-fest," English told TVNZ's Q+A.

"Back in 2008, the government put in place a guarantee when it looked like the whole banking system was at risk, and that’s hundreds of billions of dollars. So a few billion of losses for the banks is not a threat to financial stability," he said.

English specifically ruled out a bail out.

"The government has in place a system for dealing with hardship, because you are going to see, for a small number of dairy-farming families, some real distress. But we’re certainly not going to be bailing them out," he said.

Many farmers also had stronger balance sheets after the NZ$8.40/kg payout from 2013/14.

"The regime that’s in place now means the banks are stronger than they’ve ever been. They have greater ability to withstand those losses than they’ve ever had. And the dairy industry’s had a pretty good run, and a lot of their balance sheets are in reasonable shape. So, yes, there may be some losses, but I doubt they’d be a threat to the financial stability," Englis said.

Possible size of defaults

On Thursday Reserve Bank Governor Graeme Wheeler cited Reserve Bank research and bank stress tests to suggest that up to 44% of dairy loans would be 'non-performing' and upwards of 10-15% could be in default after three more years of payouts at current levels. Banks have lent almost NZ$40 billion to dairy farmers.

"A lot of the agricultural lending is dairy-related lending but we are talking about, under this stress scenario, something like 10% to 15% of dairy lending being in default," Wheeler told a news conference.

"For the banking sector as a whole: do they have the capital reserves to be able to accommodate that if that ever did eventuate? We believe that they do," Wheeler said. The Reserve Bank has previously forecast that the worst stressed scenario would reduce bank profits by as much as 18%.

Earlier on Monday in a Radio NZ interview, Prime Minister John Key rejected suggestions that up to a quarter of dairy farmers would have to leave their farms.

Asked what banks were telling them, he said banks were saying the bulk of farmers would get through, although there were a "few situations with over-leverage where there are real concerns, but they're working closely with farmers to keep them on the land."

Asked if banks were saying the percentage of farmers to fail was 5%-10%, he said banks were not putting an exact number of it, "the sorts of numbers you are talking about there are the sorts of numbers you hear the industry talking about -- it would vary bank to bank."

"There's certainly going to be some farmers that don't come through unfortunately, and that's true even in better times," he said.

Key said no one had exact figures, but he was hearing reassuring noises from the banks that they could work their way through.

"It's clearly not in their interests or the farmers interests to force everybody off the land. The question is what can the Government do. We can't force dairy prices up. The Reserve Bank has tried to play its part, in part, by lowering the Official Cash Rate. We can do things to reduce on-farm costs or make the viability of farming, and everything from irrigation to TPP supports all that," he said.

Earlier, Labour Leader Andrew Little said the Government needed to ensure banks did not trigger massive mortgagee sales. The banks needed to be "stiff-armed and told we're not going to see, wholesale, farmers pushed off the land."

"We expose more New Zealand farm land to the risk of overseas ownership and I think that is a matter in which there is a national interest the Government should be alert to, and take action on," Little was quoted as saying by Vernon Small.

English unconcerned by banks not passing on OCR

English said he was also not overly concerned that the big banks -- ANZ and Westpac in particular -- had only passed on 10 basis points of Thursday's 25 basis point cut in the Official Cash Rate, saying it was still early and eventually competitive pressures would play a role. He cited the banks' argument about higher foreign funding costs.

"I think it’s certainly real, but I also think the competitive pressures will bear in on them eventually," he said. "In the long run, we need profitable, stable banks. This country’s benefited from that over the last seven or eight years when a lot of countries have had the opposite problem, and that is banks that weren’t profitable. So it’s up to the banks to make those decisions and competition’s the best way to sort it out," he said.

'It's all about the Unitary Plan'

He also ruled out new demand side measures to control house price inflation.

"We’re not considering further demand-side measures. I think that would be a bit of a distraction. We’re waiting to see what the last round did – the Reserve Bank restrictions, the change in the tax on high-turnover houses. The focus this year is on getting that Auckland Unitary Plan right because that’s going to give an indication to the market looking out five, 10 years," English said.

He said the dairy slump highlighted the risks to the housing market.

"The difference between the two is that with the housing market, New Zealand has a fair bit of control, or longer-run influence, over what happens with it through the way that we regulate supply in our planning system. And that is why some of the decisions that’ll be made this year by the Auckland Council are really important, because if they make good decisions, we’ll get more," English said.

"The thing that matters about the housing market this year is that Auckland Unitary Plan, and it needs to indicate to all buyers and sellers that there will be sufficient supply coming into Auckland, that prices won’t keep rising forever."

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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There is considerable similarity between the oil business in the US and Dairy here....
http://www.bloomberg.com/news/articles/2016-03-08/the-texas-towns-that-l...

10
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will he come out and tell the NZ public about the OBR

What is unknown about it except some people dont want to look?

Steven, so many people I talk too have no idea, and even once you inform..... many THEN decide to put the head in the sand. "It will never happen!" they say. The same thing was said about the world largest banks in 2006 and we all know what happen... Bailouts for banks, screw the working classes. When GFC 2.0 hits that option will be used again I'm sure. My prediction is the burst will occur 2018, until then they will deny , pretend and drive us all over a cliff.

@sharetrader Some of us have little to fear, not having actually ever managed to have ever saved the probable "de minimus", baby boomers beware however.

Stupidity knows no bounds, perhaps they will increase my debt to help recapitalise the banks in question......

"If the Opposition want to support the dairy industry, they should vote for the TPP and the changes in the RMA. That would mean more than some talk-fest," English told TVNZ's Q+A.

TPPA implementation is shaky at best in the US and the outcomes Obama claims do little for New Zealand's trading relationship with China.

RT: Scott, put numbers to this, how decimating have recent trade agreements been to the manufacturing sector?

SP: We’ve lost a third of our manufacturing jobs: 60,000 manufacturing facilities closed down, and a third of all our manufacturing jobs – over 5 million – from 2000 to just this year. And the challenge has been a lot of those jobs weren’t lost because of robots or technology. It was trade deals – like NAFTA, and with China – they caused all of that. The TPP just isn’t fundamentally different from a NAFTA. And there are more economists who think this is the case. I hear it every day.

RT: Where does President Obama think the big gains are going to be? In other sectors of the economy?

SP: I think there are a couple things that the President thinks this would help with. I think it is misguided, but I think his point of view is that this will help with our service sector; and it will help with diplomatic relations; and that it would help to contain China economically or allow us to write the rules. Read more

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Using the TPPA as an example of govt action on dairy only highlights what a crap deal they got. From memory they got circa $90m in tariff reductions ,which if my maths is correct over 1.9b of milk solids is about 5c/kg. Even then it's 2030 before the full benefits are in. Not much of a response.

Does make the assumption that the TPPA will go ahead - with both Clinton and Trump against the TPPA it's looks a little shaky.

If you believe what politicians say in an election year, you deserve what you get.

More good stuff from English. I never used to be a fan but he seems to be on the money these days (no pun intended)

14
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The taxpayers of NZ are very lucky that Richie doesn't own a farm or the Nats would be in bail out mode by now.

Aren't most farmers National voters though? Is that not a fact? Even some Nat MP's are/were big farmers.
I believe the government are so into believing their own BS that acting would only be seen as an admission of failure, which it would be, but no narcissist (many MP's) would accept that.

I personally don't support bail outs for anyone or any industry. If you borrow and take the risk on markets then you have to take that decision on the chin. Yes banks are proven corrupt and rotten to the core, but that doesn't seem to stop people borrowing excessively from them. 2008 was lost on so many that it astounds me sometimes

Historically farmers have been National voters. But in the big numbers game of pandering to voters, do National really need to bother with farmers any more? They've been importing a whole new voting block.

Whoa! Bingo. Yes, and very many cash rich.....donors from Asia perhaps? Looking for a cheap farm maybe to boot?

Our immigration policy is stealthy gerrymandering on a massive scale.

As to the old relationship between farmers and National, I think farmers may be about to find themselves feeling horribly betrayed and disillusioned. Now that so many family farms have been subsumed into big corporates, country towns are emptying out, and the on-the-ground labour is skewing to non-voting work visa people, who gives a crap? Not power-hungry narcissistic scumbags who don't care about anything but the next election.

13
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Like I said .......for Billy Bob to make a hard call like that , it is more likely that ...he , John Boy and interested parties have breezed over a plan B.....
A leopard doesn't change its spots....I just don't see the Nats ball kicking Bankers given the potential losses .....nosireeebob....and Billly was leading the charge when Fonterra promised the moon.
I got a feeling the Locals won't like the "Free Market " solution to the problem.

" up to 44% of dairy loans would be 'non-performing' and upwards of 10-15% could be in default after three more years of payouts at current levels". What percentage of total dairy production do the 10- 15% produce? I'm assuming they are the bigger corporate farms. How much debt has the 10-15% got?

Seven dairy suicides since Last Tuesday payout announcement
This is a continual reality
This came from top echelon of rural bankers

That is sad.

What a tragedy.

Never mind
Presumeably they would be among the highly leveraged.
In the crash of 29 the traders threw themselves out windows.

So who is betting on a Air New Zealand style rescue package?

AJ
You are right a tragedy

How many bankers, politicians and policy analysts at MPI killed themselves?

...you mean should.

The sad reality AJ is the NZ suicide rate is greater than the road toll and climbing. The farming community both here and in Australia have lost a great number of farmers to suicide.........the info is out there but I recall being gob smacked at the number in NZ ,July to July was 28 farmers I'm thinking.
A tragedy for sure,and set to grow in numbers as Farmageddon approaches.

Frank:

Can you please email me

@ david.chaston@interest.co.nz

Thanks

National may step in to buy land later on, I suspect their focus group polling has warned them off a bank or farmer bailout at this point in time, who knows NZD may drop yet with rate cuts into year end... the stress was after 3 seasons, this is a slow motion train wreck...

I have been through this with National before, the Moral Hazard always kills it.

On the other hand SCF did keep taking deposits after the Government Guarantee .

Peter Frazer on RNZ

http://www.radionz.co.nz/news/national/298869/low-milk-prices-'wiping-farmers-out'

"We're not in a world of a soft-landing, we missed that opportunity four or five years ago. We're not looking at a hard landing...we missed that a number of years ago as well.

"We are looking at a crash landing and the issue is how many passengers will get out.

As Bernard pointed out in his article yesterday the govt have been cheerleaders for the sector and have actively encouraged its growth so are hardly innocent bystanders in this situation.

I am personally against bailouts of individual farmers but I think the govt will draw the line if it looks like Fonterra is getting into difficulty.

Some credit here for Winston as they have a debt mediation bill in the pipeline which seems a sensible measure. The is much inequity of a well resourced bank going up against a broke and emotionally spent farming family.

Not familiar with the bill but hope it differentates between the deserving family and a speculative syndicate flogging the environment and everyone else concerned.
How does it differentiate?
Resource consent hearings?

Not aware of the details but my assumption is that it provides an interim step to stop the banks forcing out those that aren't particularly well resourced to at least get a fair process. They have such a measure in Aussie and Canada evidently.

Afew,
I like your attitude but I happen to own houses in the far north and south where it wont stop raining.
We have young avocadoes in the back yard up north that are surviving.
Climate change is not so much assured destruction but increased uncertainty in my opinion.
Sea rise rates are so slow the life of our structures are less,so normal replacement should cope.
But keep up the good work, give them hell.

Trick situation, and nobody is really detailing solutions. Little's "Stiff arm" - what does this mean?

One possibility for the Government that will work to dial back the banks power and influence too will be to regulate to force banks to identify and establish a threshold at which interest rates are cancelled on farm debt, and the banks prevented from foreclosing on all but the very worst cases. Also there would need to be accompanying regulation to ensure that the costs to the banks in this scenario are not passed on to other consumers, but banks need to own their part of this issue too, has they printed money for farmers.

....best they get any regulation through before the TPP comes into force.