Keith Woodford explains the decisions and behaviours that have led to dairy’s debt-laden pickle

By Keith Woodford*

In a recent article, I wrote that high debt levels within the dairy industry will constrain the industry transformation that needs to occur.  Subsequently, I have been exploring how the industry got itself such a debt-laden pickle. Here is what I found.

Despite the industry now being well into the third season of good milk prices, dairy-farm debt with banks has been showing no sign of decreasing. The latest figures for December 2018 show total dairy-farm bank debt of $41.6 billion (RBNZ S34 series). This compares to $41.0 billion a year earlier and $40.9 billion two years earlier.  This equates to around $22.00 per kg milksolids (fat plus protein).

Accordingly, any narrative that dairy farmers overall have been repaying bank debt is incorrect. The figures tell us that for every farmer who has been repaying debt there has to be another farmer taking on more debt.

This in turn raises the question as to what have dairy farmers been doing with the increased cash flow? The answer would seem to be that much of it has gone into deferred maintenance and also new capital, including new machinery and effluent management.

Right now, we are seeing increased production, but that is largely from the fantastic season that has been occurring over much of the dairy regions. There is little evidence of new investment that will lead to ongoing increased production. In essence, it has been non-productive, but in many cases necessary, investment.

The next question has to be what level of payout is required in coming years if debt is to be reined in? A key point is that dairy farmers have always needed capital expenditure just to keep up with the game, let alone any major transformation.  I have an uneasy feeling that the breakeven milk price is therefore higher than commonly believed.

Identifying how the debt is spread across farms has never been easy. Some farms are big and some are small, so it is the spread of debt per kg of milksolids rather than per farm that we need to know.

To explored that question, I could find no official statistics, although the RBNZ will surely have some internal data to assess resiliency to shocks. So I turned to the DairyNZ Economic Survey.

There I found that at the end of June 2017 average term debt was $25 per kg milksolids. Average debt in Taranaki was $28.79 per kg milksolids and in Waikato it was $27.90. Remarkably, 17 percent of Taranaki farmers and 13 percent of Waikato farmers had debts of over $40 per kg milksolids.

These DairyNZ figures include family debt for those situations where family debt has to be repaid. Accordingly, it is not directly comparable to the bank debt which we know is around $22 per kg milksolids.

Caution is appropriate in applying the DairyNZ numbers to the overall industry. The DairyNZ survey is not random, and participating farmers come from those who submit data, usually via their accountants to DairyBase. Regardless, there is a clear message that there many farmers with very high debt.

The DairyNZ survey showed average term debt at June 2017 comprised 49 percent of assets (including livestock and shares) but with 19.8 percent of farmers with debts that were more than 70 percent of their June 2017 assets.

That then raised the question of what has been happening to dairy assets since June 2017.

The latest statistics for land prices from REINZ through to December 2018 indicate that dairy land prices have held up but that the number of sales have declined. However, everything I am hearing from the field tells me that only the best farms that are selling. This greatly biases the average quoted prices.

The messages I am getting are that for most classes of dairy farms, the prices are down 20-30 percent from where they were 18 months ago, and even then the sales are not occurring.   This suggests increasing numbers of farms with minimal equity.

By this stage I had some clarity as to the current situation, but I needed to search elsewhere if I was to understand how we got into this situation.

To do that, I went to the now discontinued RBNZ c27 series which goes from 2003 through to 2016. Eyeballing the data suggested there was a clear break at 2009 at the time of the GFC.

From 2003 to 2009 dairy-farm bank-debt increased from $11.3 billion to $29.0 billion. During that time, milksolids production increased by 202 million kg. So, on the surface, every extra kg of annual production incurred an extra $88 of debt. This is a very high figure!

However, during this period something else was happening. In the South Island, many low-debt sheep farmers were selling their farms to new high-debt dairy farmers, who often set up syndicates leveraged off their existing North Island farms. And in the North island, older low-debt dairy farmers were selling their small dairy farms to other dairy farmers who were on an expansion journey, with these land transfers also financed through leverage against existing assets. 

This all worked because land prices were increasing rapidly which gave the leverage.  The banks were queuing up to finance the expanding farmers.  The result was that overall industry debt per kg milksolids increased from $9.48 to $20.81 Wow!

Then from June 2009 to June 2014 debt rose again from $29 billion to $34.6 billion. But this increase was accompanied by big increases in milk production of 432 million kg. So, total bank debt per kg milksolids actually declined from $20.81 to $18.93.

With hindsight, it is now evident that the seeds of the current situation were well and truly sown in the period from 2003 to 2009. This was the period when farmers got heavily into the business of land-banking and relying on inflation plus capital gain to ‘see them right’.  The banks loved it!

Then came a more focused period where milk prices were outstanding through to 2014 but capital gain was more restrained. The new debt was used alongside profits to generate increased production, although some land-banking was still occurring.

Most recently since 2014, the industry was for a while drifting towards a rocky shore, but with improved prices has now become becalmed, at least temporarily.  Two years of bad prices plus 2.5 years of good but not outstanding prices have largely cancelled each other out. For most farmers, low interest rates have been the saviour.

The big questions that remain to be answered now relate to the future. That is too big a question for now, except for some key observations.

First, banks are no longer queuing up to finance dairy farmers, and when funds are available, government policy says that funding is no longer to be on interest-only basis. Second, the overseas buyers have disappeared, linked in to new Government policy on overseas investors. Third, dairy farmers have lost confidence about the future linked not to milk markets but to societal pressures.

The overarching outcome is a debt constraint that comes up against the industry transformation challenge.

*Keith Woodford was Professor of Farm Management and Agribusiness at Lincoln University for 15 years through to 2015. He is now Principal Consultant at AgriFood Systems Ltd. His articles are archived at You can contact him directly here.

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?

We welcome your comments below. If you are not already registered, please register to comment or click on the "Register" link below a comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current Comment policy is here.


"Government policy says that funding is no longer to be on interest-only basis". About time!

"every extra kg of annual production incurred an extra $88 of debt. This is a very high figure!...This all worked because land prices were increasing rapidly which gave the is now evident that the seeds of the current situation..... was the period when farmers got heavily into the business of land-banking and relying on inflation plus capital gain to ‘see them right’. The banks loved it!"

"low interest rates have been the saviour." Not better farm practice; better productivity; better methods, but a 'better'; cost of debt.
Anyone who wonders where interest rates are going from here, and doesn't think 'down' needs to have another read of the above article.

You know what would reduce dairy debt, land banking and move more farms into the hands of those who work the land at the same time? A revenue neutral land tax.

So....Land Tax the farm (an additional cost) then, do what with the raised revenue to make it 'neutral' for the farmer? Pay his debt off? I'm not sure how that would work.

Land Tax all property, including farms, by all means, but the only way I can see to make it 'neutral' is to lower the cost of funds a farmer pays on his existing debt so that a new Land Tax is offset by a lower interest rates bill. (and stop any more debt being taken on unless it's within far more restrictive parameters. That applied right across the New Zealand economy) But maybe there's another way?

Revenue neutral for the government. So reduce income tax perhaps. Cheaper land, less debt, more take home pay but more land tax. So it's a 2 to 1 win for farmers wanting to buy their farms, a loss for banks.

The other effect of increased debt/KgMS is that corporate farming is best placed to attract, manage and roll over that debt. It's nothing to see 20-80 farms under one corporate umbrella: one set of accounting, administration, compliance control, and overall strategy. Call it the Big Green Shed style of dairying....

You need to analyse the reasons debt on some farms is not being repaid .
Within my client base, those who resist intensification, stick to the grass curve, don’t have excessive machinery, have moderately performing cows and farms, run uncomplcated farm systems without excessive labour requirements, track their cost of production closely, harvest a lot pasture, are all doing remarkably well financially. They are repaying long term debt , paying tax and enjoying a stress free life.
The above farm systems are not what you have advocated in resent years .

Agree Westminster. In Southland significant capital is being spent on things like herd home type barns because of the perception that this will help environmentally - especially N leaching. Some consultants have been for some time, recommending not to go down that pathway unless you have a full understanding of what the water quality issues are in your catchment. Herd home type barns are a mitigation for some issues but not all. NIWA research has shown that seepage wetlands can reduce nitrate leaching by 70 - 90+%. If you have a farm in a N limited catchment and put in a wetland where a significant part of your farm drains into it, you may be better off to put your $ in to that than building a barn - and your debt levels are unlikely to increase, if at all, to anywhere near the same level as building a barn when the costs of managing that barn are also taken in to account. The environments biodiversity also wins in this situation.

Casual Observer,
It is important to distinguish between herd homes ,composting barns and free-stall barns, not only in terms of capital cost, but also how they fit into the farming system. Of course, I have no objection to the development of wetlands in specific situations, and would applaud people who can mitigate N-leaching in this way. But my experience would be that on most farms that is not a pathway to solving the N-leaching. Also, with wetlands, we have to be sure we are affecting final outcomes and not just slowing down the movement of the N through the system.

Keith, I agree there are various tools in the tool box for water quality of which barns, in whatever type, could be one. If we are going to make a significant difference to water quality though, we need to look at ways that are likely to be a game changer at a catchment scale, not individual farm scale. These may prove to be more cost effective and longer term solutions. It is crucial that farmers understand and know what the issues are in their catchment before committing to capital expenditure. e.g. The real issue for water quality in Southland is sediment not N, though there are isolated catchments where N may be more the issue. P, not N, is more the issue in our lower catchment were the soil is peaty. The Environment Southland Wetland Inventory and Monitoring Project report dated Sept 2018 states that "40% of wetland loss occurred on dairy farming and support operations" (pg 20) so the majority - 60% was not on dairy farms. We need to be careful that dairy is not the sole target for N mitigations.
In the same report it says (pg24) "in Southland it is predicted that wetlands occupying 2-3% of contributing catchments could reduce annual nitrate-N losses by 30-40% and also substantially reduce other contaminants".

The NIWA report I referred to in my previous comment

For an example of various research in to on farm trials of nutrient mitigation

Casual Observer
These comments are helpful and I have followed through the links.
The first report cites a paper presented at the 2014 FLRC conference, and this paper then reports a NIWA client report which is not public. But the figures are predicted rather than actuals, with no public information as to the prediction method. And citing in this way through a cascade to a non public sources is not the way science is meant to be communicated.
The second report (the DairyNZ technical note) is much more insightful. It indicates that the N retention is measured as water inflows versus water outflows. The problem here is that there are big lags between inflows and outflows (many years) but eventually the captured N has to go somewhere. The report says that it will go through a process of denitrification to gaseous form. What is not said is the known science that anoxic dentrification leads to production of N2O (nitrous oxide) which is a very powerful greenhouse gas.

Playing round with some numbers, let's assume a hypothetical 1000 ha catchment where 25 ha (2.5%) is reconstructed wetland. Let's also assume the pasture leaching of 40kg/ha, this being the figure stated in the Southland report. And let's assume a lower figure of 30% nitrogen removed through the wetland.
In this scenario, the retained N = 1000 x 40 X 0.3 = 12,000 kg of N to be soaked up by 25 ha of wetland = 480kg N per ha of wetland, with this going on year after year. It is a theoretically nice N leaching story but not a pretty picture at all in regard to N2O production. Alternative scenarios with different numbers still can not get away from the big picture of big production of gaseous N2O.
Accordingly, I see wetlands as having a range of ecological values, including flood retention, but they are not a long term sink for sediment (the sediment will eventually mean it is no longer a wetland) and they are not a long term sink for N.
I agree that P and N need to be considered as quite separate issues.

Keith, yes the GHG v environment debate is something that most people don't realise needs to be had. Not all environmental mitigations are GHG friendly. Old established wetlands can be carbon sinks but I have been told there isn't a lot of NZ research on that. So wetlands can emit while young but can be postive when well established. It's a bit like putting up structures/pads etc - if the ghg emissions from the concrete etc are included it might make some think twice.
The lag times in Southland are short so any simple mitigations should show up quite quickly, so a lot does depend on where you are. In our catchment it is a matter of as low as two weeks, up to as much as three months depending on where you are. Scientists estimate that for about 80% of Southland it takes less than one year for nitrate to travel from the soil down to the groundwater. For 90% of Southland, it takes less than two years. edit link added
Whether wetlands need to be a complete sediment sink or simply slow down the rate it travels into it's final receiving waters, so that overall the load is reduced, can be an interesting discussion to have with water scientists. ;-)

Actually, I have never advocated against such systems.
But I have advocated that there can be more than one way to salvation.
One of the characteristics of the farms that you mention is that they don't usually survive the succession journey. Typically they get gobbled up by neighbouring farmers.
What I try and do is analyse what is happening and why.
I also try and alert people to the disruptive forces that are on the horizons.
In terms of my own opinions as to what is best in terms of small and large farms I tend to keep my own value-judgements private. But I do like to see a debate that is well informed, and recognises the implications of particular pathways
As one example, I have always been interested in once-a-day milking as part of the overall package of dairy systems that can have a role within New Zealand. and some 15 or so years ago I supervised a masters thesis on that topic. From memory, those results were presented at the International Farm Management Conference way back in 2005.
What I do try and react to is tribalism that says there is only one way and the associated confirmatory biases.
In relation to dairy debt, one of the key points I am trying to make is that much of it had nothing to do with increased production; rather it was a structural change with low-debt farmers being replaced by high-debt farmers who were able to make their purchases with leveraged debt rather than introduction of new equity.
Keith W

Keith, it depends on what you define as “salvation”. For you, it seems to be how to increase production at the expense of any profit and ability to repay debt.
Your comment about not surviving the succession journey is bollocks. You have chosen to ignore that these farms are doing remarkable well financially.

I am not feeding into your tribalism theory and saying there is only one to operate. I’m happy to to be enlightened to other profitable systems, but what I observe from my clients is the other options to date, aren’t nearly as successful.

You’re oblivious to the ‘cost’ of the additional production. You are not alone in this - the industry over the last 15 years have been chasing production (“salvation") and now they’re struggling to pay down debt, whether low or high debt.

Given that I have spent considerable parts of my career teaching production economics I am fascinated to be told that I am oblivious to the cost of additional production. Your comments about me demonstrate false association and the straw man concept which so often lie at the heart of tribal fights.
Congratulations to your clients for being so successful. In terms of economic success, there is considerable evidence that the differences within farming systems are much greater than the differences between systems, so it is good to hear your clients are in the successful group. I have always been interested as to why success shows more variation within system than between system, but of course it is much harder to study the differences within systems because these are multi-factorial and relate to soft rather than hard variables and parameters.

A wintering barn isn't going to increase production either, yet you appear to be advocating more debt that wont increase production. No wonder productivity is so low in NZ, even the experts are promoting non productive investments.

Keith, Is the numbers on dairybase large enough to draw debt conclusions from? We were on it but no longer are as there weren't enough owners with sharemilkers on it relative to our region. We are more typical of hte farmers Westminster refers to. I am aware though of banks asking some of their more indebted farmers to signup to dairybase - so perhaps the data from that is skewed towards high debt farmers?

Casual Observer,
Yes, there are considerable limitations with DairyBase. But in the absence of anything better, it does tell us something about the broad picture ,and the significant number of high-end debt farms. For bank debt per farm I rely on the RBZ series but that series tells us nothing about the spread.
Most of the Dairybase farms also tend to be lower input farms - the high input farms tend to be somewhat anti to DairyNZ and some of the DairyNZ messages. Consequently there is no separate System 5 in Dairybase - it is lumped in with System 4 because of lack of numbers.

Nice write-up. Keith, I'm not sure it's right that Government policy says that funding can't be on interest only terms. Prevalence of interest-only terms has been declining, but, as far as I know, that's been driven by the banks themselves (and some banks may still be happy to provide interest only terms to farms carrying lower levels of debt relative to their income and farm value).

I think RBNZ policy and also RBA policy are impacting on bank requirements. I agree that the Government has never said explicitly thou must not lend 'interest only' to dairy farmers, and the specific decisions relating to each farm therefore lie with the commercial banks. But it is the prudential requirements from the central banks (NZ and Aus) which are driving new overall behaviours.
Keith W

These farms for the most part have been farmed for over 100 years ,without needing foreign labour , they were fenced ,and fertilised ,and your saying in six years thru gung-ho borrowing we have created a huge train wreck that can’t be turned around

Go the Farmers!
I just have to cheer the farmers on....

Go the Blues....
Its different this time.

A couple of things in comments...
The Economic Survey and Dairybase are two different things. The Economic Survey uses Dairybase date but is pretty well moderated using objective data - such as RBNZ debt info, LIC regional production etc. it’s pretty accurate for National and regional averages but less so for distribution curves.

The increase in debt 2003-2009 was mostly about land consolidation, and it’s not realistic to look just at additional debt over increased production. If you isolate land purchase, additional production cost about $15 per kg. In other words, very good capex. Land purchase contributed some advantages through more efficient scale as well.
Debt is, and looks like remaining relatively low cost apart from where farms are overgeared. This is the big issue - reducing values decreasing equity, reducing bank risk scores and increasing bank risk margins. Value falls are at least as steep as set out here, and there is no new equity coming in to increase demand.

I agree with all of these points

Also, RBNZ and APRA are definitely demanding banks increase farmer principal repayment - no doubt about that.

I always enjoy your articles Keith.

I remember hearing around 20 years ago, that the banks own a lot of the farm land in the UK. Not sure if that was true or not.

But it seems to be the case here more and more! The bank's names are not on the title but they own 80%+ of many properties...

Keith it is good to see you exploring the money supply. It is in my view the structural foundation for the situation farmers are in and is somewhat predictable. Policy just determines the pace at which the outcomes happen.

I think when it comes to housing the supply side debate has been well and truly put to bed by the understanding it is really a credit fueled asset bubble. Farming is no different.

When you have interest on a money supply production has to keep pace with the rate of debt expansion. Debt expansion is necessary to pay the interest in existing debt. It is like compound interest, but is the inverse side of it. It all works as long at the interest can be paid by increased production. (You could say that farm production is helping the housing ponzi along by supplying a good portion of the production to pay the interest.) Interest rates will reach a point of maximum extractive value, a point well passed, and then decline until something breaks. An expanding money supply at every decreasing interest rates is necessary to keep the game going. The proximity of interest rates to zero gives an indication of how close we are to the game not working anymore.

I have modeled this by reworking the quantity theory of money to accommodate interest. M.V=P.Q becomes (M.V)+i=P.Q.

Another sidebar to all this is that not all 'debt' is bank-financed. Equipment financing is often through the supplier, and I've seen repayment schedules with effective interest rates as low as 0.99%. As most equipment is manufactured offshore, policies like ZIRP travel across national boundaries.

Not saying that this sort of financing is either at the low rates I've observed, or that it constitutes a material percentage of total debt. Just saying that all debt is not created equal.

Well said Scarfie!
It’s great to read more accurate economic commentary in mainstream media lately, that which people like Prof Richard Werner, and Prof Steve Keen have been telling us for the last decade or more.
See an article last week from our own Brian Gaynor:
NZ Herald, 9th Feb “power of banks to create money”
Really a lot of the outcomes at farm level are as a result of the imbalanced/undeserved role private banks hold in creating/directing new money into the economy. The banks aim is the saturate clients in as much credit as they can get away with, hence they grow their “assets” book and claim the lions share of the businesses cashflow.
The recent Australian Royal Commission outcomes show the complete lack of political leadership to move toward economic regulations that provide productive rather than speculative outcomes for the whole population.

There is also a special place for the muppets willing to take on the debt. But tough when they are sold a lie.

we shouldnt expect much different from main political parties of course, given most retire from politics into overpaid roles within said banks. Be it here, australia or UK etc

Hi Waymad, equipment finance may look like ex supplier but it’s really mostly bank money, white labelled, with suppliers acting as agents for the banks. That’s core business for UDC for example. A discount is deducted to create a low finance rate.

Sometimes. Big manufacturers like JD operate their own internal financing.

There's a world of difference between paying deductible interest and taxed capital. These operations were never meant to pay of debt, they were designed to take advantage of the lack of tax on capital gains.
Now we get to wait till growth goes negative, deflation is otherside of the inflating world we have got used to.

Now we get to wait till growth goes negative

That pretty much sums the game up.

So, farm debt doubled in the stagnation years of the Clarke government, just as housing debt did. It stopped increasing under the Key/English government. We are stuck with it. The Aussie debt farmers seem to be winning.

As Westminster observes (and the author seems to object to, not sure why), some farmers are now doing okay. They have deep pockets and little debt and keep stock at levels the farm can comfortably support. The over indebted corporate style farms are unable to repay debt.

Is it just me, or have I seen this movie before?

Indeed some farmers are doing okay, and some farmers are even doing much better than okay. The farms (and farmers) come in all shapes and sizes. And they have traveled down all sorts of pathways to get there. I have the pleasure of working with some of them. But the rest of your comment is based on generalisations and associations that are greatly flawed. Seeing the industry as bi-structural in the way you suggest does not provide a foundation for moving forward.

I don't disagree with you Keith. I see the high debt levels as the result of policy based on deluded ideas. Farmers need to think generationally, as "Live as if you will die tomorrow, but farm as if you will live forever". To do that they need deep pockets. Deep pockets come from savings built up over lifetimes on the basis of sound judgement.

Contrast this with our "modern" thinking, where debt and fast returns on land speculation have been our undoing. The benefits flow to overseas banking, not to our farmers. Real wealth has a stabilising effect on society and yet it is fashionable to run it down. We delude ourselves that low interest rates and more government spending are good for the economy, yet turn a blind eye to their long term effects, that NZ has become a debt farm.

Farming people is so much easier than farming other livestock, people queue up at the door to pledge their working lives for a better barn. I'm not saying banking is bad, but we have encouraged excessive privilege to be gained by them.

Lest you think this is a modern delusion:
Edward Gibbon wrote in his Decline and Fall of the Roman Empire about the son of Marcus Aurelius and how he set in motion the collapse of Rome. He wrote of Commodus (177-192AD):

“distinction of every kind soon became criminal. The possession of wealth stimulated the diligence of the informers; rigid virtue implied a tacit censure of the irregularities of Commodus; important services implied a dangerous superiority of merit; and the friendship of the father always insured the aversion of the son. Suspicion was equivalent to proof; trial to condemnation.

While checking out this very good article by the professor I happened to look further down and the old Crafar debacle story jumped out at me. Which reminded me I heard some awful news recently. I know somebody who was on one of the Shanghai Pengxin farms recently. He said he saw bad stuff. Animals in terrible distress as they couldnt get to water. Currently we are in a very dry heatwave and the central plateaus pumice country becomes unbearable.
What he saw was this. The property was extremely rundown. There were 6 month old pot belly half dead calves wandering along roads desperate for water. Staff were imports and didnt seem to understand animal welfare. Physically he helped push dehydrated animals to water. They were too weak to move properly. He was disgusted and angry. Unfortunately his livelihood depends on himself keeping a low profile. He also mentioned the supervisors of the chinese farms are moving on. We both wondered if they have had enough of not being able to run the farms properly due to lack of funds. My contact knows dairy farms. This particular one disgusts him.
So much for the mega money they were to invest in these ex crafar farms. So much for the 'training' they were going to do of young farmers. Basically in a nutshell on this particular farm things are similar to when Crafar owned it.

If this is so
This is OIO stuff.
The flips some farmers are doing to get into A2 and farm management premium programms, massive contrast to this.
Begs the question how these guys get through farm monitoring by council, mpi & dairy company.

So second hand gossip reported on social media is fact is it ?

If their are any concerns then their are appropriate places to report such .

I did the reporting thing to MPI a few years ago Westminster. It was unsatisfactory. Its easier to just bitch and moan here and hope that someone else takes up arms. I am just getting grumpy hearing the same old same old about stock being mistreated.
Yet these farms were feted as being a great thing for New Zealand. What a joke. Most of us knew it at the time but the government at the time were pandering to all things chinese. Thankfully they were shut out of Lochinvar Station.
Now a New Zealand company continues to run Lochinvar and by all accounts it is very well farmed.
There was plenty of interest in the Crafar farms from NZ farmers at the time. But noooo we had to let them go to a corporate foreign entity.
So now are they rundown hellholes?