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Bernard Hickey wonders why NZ Inc decided to borrow NZ$30 bln to bet on a volatile commodity price

Bernard Hickey wonders why NZ Inc decided to borrow NZ$30 bln to bet on a volatile commodity price

By Bernard Hickey

Just imagine being approached by someone in the street or online with an investment proposal that went something like this: 

How about you borrow almost NZ$30 billion to invest in something that produces a commodity that swings in price by more than 50% over a two year cycle? How about you invest in producing that commodity on the idea that demand for that commodity has moved structurally higher, but pretty much ignores what other suppliers of that commodity might do?

Would you consider that a risky proposition that deserved a very healthy dose of scepticism? Would this sound like an even bigger and more dangerous version of 'Think Big', which relied on huge debt funded investments that assumed a high price ad infinitum for a single commodity and did not consider the supply response of other producers? You would probably be more than a little sceptical.

Yet that was the proposition that New Zealand Inc essentially agreed to invest in over the last decade. This is the story of the dairy boom that has now bust, leaving dairy farmers holding debts of over NZ$40 billion and producing a commodity that is currently losing them more than NZ$1.6 billion a year. Those debts are worth more than three times the income produced by that land and up from just NZ$11.3 billion as recently as 2003.

The Reserve Bank has forecast that if this week's payout cut to NZ$3.90/kg is extended into next season and then recovers only slowly after that then 44% of those loans would be non-performing. That doesn't necessarily mean the banks would kick 44% of farmers off their land -- they are more likely to roll over most of that debt to avoid mass mortgagee sales -- but it does mean the banks face profit drops of as much as 18% and land prices could fall 40%.

No other business leader in any other industry would borrow three times income to build a business that produced something they couldn't control the price of, which could fall 54% in two years, and the production of that commodity depends at least partly on the weather. Robert Muldoon was ridiculed and condemned for borrowing and betting big on a continued high price of oil when he invested in petro-chemical plants at Motonui, Waitara and Kapuni, and indirectly on the Clyde Dam and Tiwai Point expansion.

This sort of investment decision makes no sense. Unless, of course, you weren't actually borrowing the money purely to produce cashflow from the sale of that commodity. It makes perfect sense if you are borrowing money to push up the value of land, the gains from which are tax free.

Most farmers would vehemently deny they are farming for tax-free capital gains, and most do indeed hold their land for multiple decades and often for multiple generations. But it is simply not credible to say that land value is irrelevant in their decision making. It's certainly relevant in the decision making of the banks who lent them the NZ$40 billion and no other business in the country could borrow that much to invest in any asset other than land.

Rod Drury and Stephen Tindall, for example, would never even have dreamt of asking banks for billions to grow their businesses. The bankers wouldn't have even let them through the door with a proposal to borrow against the value of a bunch of shop leases, stock, computer code and sales agreements.

Finance Minister Bill English put it best this week when he said it was time for farmers to be more like proper business investors.

"This is an industry where they've had a focus on growing equity and growing land values for quite a long time now. It's going to be a significant adjustment to getting back to the core business of effective farming for cash flow," English said. "They are going to see land values drop. That is pretty much certain," he said.

However, the Government can't ignore its role as a cheerleader for the collective investment decision that farmers made over the last decade. It has actively encouraged the massive conversions and intensification of land use of recent years through (albeit small) loans for irrigation schemes and by making the dairy expansion a centrepiece of its central 'Business Growth Agenda' goal of doubling the value of primary industry exports by 2025.

And then there's the pesky matter of tax free capital gains. Not even Labour has suggested farmers should pay tax on capital gains. That would be one way to change the perverse business investment decisions that led New Zealand Inc down the path to Think Big Redux.


A version of this article was also published in the Herald on Sunday. It is here with permission.

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138 Comments

This is the article that Bernard should have penned when the dairy price was $8.40....

... and which he would have been surely ridiculed for.

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That's why he didn't write such an article back then

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Bernard has been banging on about this for years. Like a lot of us we all saw it coming. It has been topic number one for so many in the rural industry for a long time. We couldnt believe that after each mini disaster ie drought, flood, collapse in payout, they just ramped up the debt some more. Aided by a govt or should I say govts that encouraged it. And encouraged foreign competition and local (landcorp) for our land.

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Sounds very similar to the housing market.

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The Government owns 1 in 16 houses in Auckland and pays around 2.2 billion in accommodation supplements and WFF....and the combined effect is a large house price distortion......hence Government should not own or invest in assets.

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You do realise the 2.2 billion is going to private land lords right? So this has nothing to do with state housing, which functioned perfectly for the last 70 years until illegal and foreign money came into the country.

And you know what else distorts the housing market? The lack of a comprehensive capital gains tax and negative gearing...but I don't see you advocating this. Maybe because you benefit from it...

but keep trying to scapegoat the poor and marginalised.

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Oh I do not scapegoat the poor nor ever wish to marginalise them or anyone else and that is why I will never ever support policies or politicians that keep people poor.....when are people like yourself ever going to wake up and realise that it is your beliefs that are keeping people poor and marginalised?

Take a look SpaceX so far 9 people agree with your ignorant comments......you are the majority......and weak people in Governments have given into your demands and provided at other hard-working people's expense all the material necessities and yet the number of people poor and marginalised has increased.......it is not the fault of landlords that the Government provides subsidies to low earning people is it.? Would you prefer they didn't provide a service and let the poor and marginalised sleep in the local park!

What a load of nonsense on Capital gains tax....the easiest piece of BS to spin online is the capital gains tax nonsense.....go to the naughty corner stand in a bucket and lift yourself up by the handles....you can come out of the naughty corner when you can lift yourself up!

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Always raising the bar for absurd comments, and faulty logic.

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Exactly, and all the things banks and farmers were saying about demand for dairy, the banks and realestate agents are saying about Auckland property. The reasons I haven't bought a house in Auckland is exactly the same as why I never bought a dairyfarm. The cashflow is sht, in other words its a crappy investment, and at the end of the day cashflow is king.

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And a further thought
Was our wonderful "no policy" Gummint responsible for its sole real policy which was to double exports by 2025 largely based on heavily polluting dairy cows?

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Around where I live there are little old cowsheds on ex sheep and beef properties that are now large dairy farms. Talking to an old farmer from the district about 8 years ago he said when they arrived in the area everyone was a dairy farmer. It all keeled over farmers sold up, farms amalgamated into sheep and beef farms. In the late 90s early 2000s these farms went to a new generation or were being farmed by the very old. They reckoned they couldnt make money out of sheep or beef any longer. Many felt they could convert, put a sharemilker on, then retire themselves with an income from the farm. Sheep and beef farming could not do that. Lucky for many they converted. They borrowed several million. But farm values went up substantially, and the older folk sold up. In came the equity guys. The vet, the sharemilker, the city dude. The foreigner. They paid megabucks. A lot of it financed with debt. I got the impression many of these farms struggled to make money except in the exceptional years ( the $7 to$8 payouts). Even then it was solely on bought in feed as we have had 5 very dry years in the last 7. My point is, the money did roll in. It was the electricians, the vets, the contractors...silage fencing cropping etc....the bureaucrats ....councils via rates and consents..obviously the banks, lawyers,accountants....everyone from little townships to the main centres has done gloriously out of this. Except the current landowner. I wont call them farmers as many of them arent. The current landowner is left holding the bag. The bag being an overcapitalised piece of dirt that is rapidly depreciating. In the next few years will there be unused rotary cowsheds growing weeds through the breaks in the concrete dotting the landscape? Probably not. I dont know how but I think they will survive. The loss seems too enormous otherwise. However remember all the people that made money out of the landowners. That money is still spinning its way around the provinces. Whats going to happen when those funds run out. Which will be shortly. All those borrowed billions. 47? Then what? Wheeler knows.

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That's a sad tale. Interesting that you think they will survive. Probably right as farmers are a resilient lot. It will however require a major overhaul of how success is measured on the farm. Buying the neighbouring farm to double the size of one's operation or converting sheep and beef or god forbid forestry land to dairy may well make sense if seeking economies of scale but the fundamental reliance on a single customer (China) to continue to buy your product at a premium price is utterly reckless.
There are a raft of entities to blame here and it's a rather long list but we can look no further than our friends at Fonterra for espousing and pursuing a volume strategy that shackles the NZ dairy farmer to a never ending cycle of expansion and debt.
Their head of strategy and other fancy titles may have just resigned but I suspect they may want to go somewhat further and reconsider their entire raison d'etre.

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I am beginning to wonder about this legendary resilience. Take a look at some of the 'systems' some of them locked themselves into. Backed by debt. Very high cows per ha. One of the neighbouring farms was sheep and beef. It was a good farm but dries out quick. The first guy milked 500 cows then dropped it back to 450. Next guy milked 700. The next with a bit of extra land milks 1000. Ahem with N only..its bright green. No clover. No base to the pasture. This is an unfolding disaster.
South Island irrigation system. According to Peter Fraser some of these farms break even is $8/kg.
System 5 or 4...high input feed and mechanisation. High debt. Where is the resilience built in to this?
For a rather large percentage resilience got left out of the equation when putting together their business model.

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Agreed. My reference to reilience was about individual character. For many, their choice of enterprise and business model pursued makes little sense. A better understanding of marginal cost of production would save many from overstocking and overdburdening themselves with debt. As for the use of N, the current focus on reducing inputs on the farm is forcing many to cut back. Ironically, if the farmer pays close attention to the impact of less N on pasture and production, they may be surprised by their returns which of course brings us back to the issue of marginal cost of production above.
On irrigation, we have completely lost the plot. Just because the Israelis have been able to turn the desert green, doesn't mean it's a good idea to copy this elsewhere. Some land is meant to be dry and we can try and change the enterprise mix at a cost. Look no further than the idealogues at the HBRC and their bone headed approach to investment in the Ruataniwha dam. I wouldn't trust these people to spend $1 of my money wisely but they're going to blow $80M to entice farmers to pay 27 cents per cubic metre. Good luck to any farmer regardless of enterprise to make money at that price. No surprise that they're struggling to get private sector investment.

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The dairy multiplier effect in action. One of the posters said it was 7X
Wheeler knows all right - that's why we had the big wheelie last Thursday. I can just picture his numbers man running into his office sometime in the last month screaming "boss -you've got to see these figures".
Thursday was Wheeler saying that helping dairy and the export market is now more important than worrying about a bit more fuel on the AKL housing market.The only thing that's going to save dairy/Fonterra is a much, much lower kiwi, the 2% fall from last week isn't going to do it. Trouble is every other country wants a lower currency.

Is there an Air NZ type bailout coming up?

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Yep, I reckon there is Smalltown...by Christmas the government will be negotiating a bail out for Fonterra (too big to (let) fail?), and part of the deal will be that Fonterra has to spin off its value add businesses, including Tip Top (est value $600m only a drop in debt ocean)...Fonterra farmers will be left as suppliers to a commodity milk powder business, with some sort of arrangement with their recently sold value add business for supply, which will probably be owned by a foreign entity...

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Why doesn't NZ put another undersea line in & set up data warehouses to back up Europe's & the US's servers?; perfect timezone and safe jurisdiction. That would lead to more silicon valley opportunities; NZ should take a leaf of the silicon roundabout example of London. NZ government should pay for the cable as a clear infrastructure item that would benefit all & would pay itself back 50 times over in increased productivity - NZ internet speeds are pathetic on a world scale.

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We don't because our government/s take it up the jaxxy as far as certain sovereign decisions & control goes. The U.S. tells us what we can and cannot do in regards to things like laying undersea communication cables. We quite simply have gutless leaders on both sides of the house in that regard.

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Classic NZ get-rich-quick Cargo Cult. What will be the next magic commodity we ritually sacrifice the rest of the economy to?

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Perhaps it's time to cycle back round to goats again.

Or tear up the entire countryside for banana passionfruit orchards. China can't get enough banana passionfruit. We'll all be rich!

Or diversify and make a variety of value-added products. No, that's just crazy talk. Borrow billions and pour it into something we've convinced ourselves beyond all reason is subject to infinite demand, then sell all the genetics and technology and drive it into the ground is the way forward to prosperity!

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And the beat goes on

Very interesting article ... produced and published here on interest.co.nz back in 2012 ... which raises the question ... does any of this ever penetrate the minds of the lever pullers? ... we never seem to hear from any of our captains of politics ... ever ... other than to say ... continue on the way we are going ... we are resilient and it will see us through

And re-inforced by this article published in stuff in 2016
http://www.stuff.co.nz/business/77750969/experiments-with-immigration-n…

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the dairy boom reminds me of the kiwifruit boom and bust, or the venison boom and bust. ok they were on a much much smaller scale but its our history. its also human nature when people see others doing well out of a boom they want to join in

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Apples will be next

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Capitalism, and more specifically, unregulated markets-type capitalism, spawns nothing but boom and bust cycles.

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Apart from the fact pines, atbe, will increase in volume/quality and the operation cost/m3 will decrease if one chooses to slow down havesting rates when prices are low.

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A wonderful article !

Problem is our universities are churning out Political Science, English, Physiotherapy, Sports Medicine majors as our most popular subjects vs the much harder Maths, Engineering degrees that we need to compete in the real world.

Bike trails are nice but can only ever be an add-on and we can't forget Tourism is one of the lowest paying jobs we have today.

We need to incentivise study to the STEM subjects with FREE fees and double the rest.

Then and only then will we be in a position to compete in the real world.

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The problem is the "harder" degrees are harder for no appreciable reward. Take engineering, I spend 8 years doing a OND, HND and B.Eng and got made redundant twice and basically screwed over and had at best average pay to go with it. Came to NZ and got made redundant once, threatened with it twice (I moved first) and had various attempts at screwing me over for a decade and at 40 was looking at very little work or decent pay down the road. So I left the industry and went into IT, doubled my salary inside of 2 years, have way better work conditions, reasonable job security and pretty decent money.

So frankly yes you could offer a free 4 year engineering degree but dont do engineering afterwards, its an extremely good basis for other jobs however.

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Yep me too. When I was a pup engineer with a B.E. in the good ol' NZPO, I can remember looking at the IT employee pay scales and thinking, wow, how come I put in all this effort to get qualified when they earn so much with no particular qualification requirement? I stuck it out as an engineer until I got registered (5 years post grad) then left and headed off into IT. Then I learnt about how much you could make in IT sales, with absolutely no qualifications...but that's another story :-)
If you want your Internet to work and your buildings to stay up, be prepared to pay a bit more for it.

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The backstory that's missing here is the courting of New Zealand by China. A smallish, economically vulnerable nation in the Pacific, a member of Five Eyes, finding it difficult to (or choosing not to) pull its military weight with its ally Australia - it has been an attractive bet for China. Did New Zealand persuade China to enter a free trade agreement - its first - or did China hold such an arrangement out?

Thereafter the apparent promise of an unlimited, uninformed market suitable for an expanded commodity strategy (although dairy products are/have been historically considered an inappropriate adult food in Chinese culture), has been sufficient to set dollar signs spinning in the eyes of the government, its civil servants, Fonterra, industry advisers, the banks and farmers.

The relationship with China, with whom we now have a Comprehensive Strategic Partnership including an agreement for defence engagement, seemed once and for all to solve New Zealand's economic vulnerability and its place in the world. Throughout, on our part it has been a case of colonial commodity thinking looking for another colonial power. The results of this naivety will last for decades - politically (with a fearful, compromised national government), diplomatically (in terms of our now tangled international relationships), economically, socially (in terms of the displacement of our traditional farming model) and, not least, environmentally.

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Dairy is an inappropriate food for infants also workingman. The crazies can rail against breastfeeding but you cant beat mother nature. It has long term effects. My mum gave up when I was a couple of months. So I was a cowsmilk kid. Blah. Cant eat a steak without breaking out in a rash. Ironic being a beef farmer. Pity the chinese kiddies. Of course if you have a chinese herbal gripe water you are on a winner.

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Yes. Cow's milk is intended for little cows.
Not for little humans

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Possibly - but others are enduring the same downward price spiral for different claimed reasons.

600+ tractors in downtown Helsinki as Finnish farmers decry anti-Russian sanctions Read more

To my mind the best explanation is found in Hickey's claim:
This sort of investment decision makes no sense. Unless, of course, you weren't actually borrowing the money purely to produce cashflow from the sale of that commodity. It makes perfect sense if you are borrowing money to push up the value of land, the gains from which are tax free.

This is a social wealth redistribution exercise undertaken by the global central banks affected by redefining inflation. Such ideological intent is pernicious and needs to be rooted out and publicly determined as an elite only wealth grab. In as much as the process is by default debt funded it's progress is limited by the reality of a compounding inability to service and redeem such liabilities. Nonetheless, the protagonists are fiercely protective of their gains and demand action forever lower interest rates to feed the utopic failure. Can ~4.4 million NZ'ers sustain this private pyramidic faux wealth behemoth? I doubt it.

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True, Stephen, the global commodity price has collapsed via global volume growth. But New Zealand chose to bet the farm - and much else - on China. Dairy growth in Europe and other parts of the world was ignored because of this one-eyed fixation, the belief that the relationship with New Zealand is of some privileged value to China (it is, but not in terms of dairy supply). The desperate nature of this relationship is well indicated in the refrain repeated by industry thought-leaders that China will 'come to the rescue' - an extraordinary message to give to customers, making it perfectly clear where power resides.

Leaving aside the politics of this relationship, there has also been remarkable mismanagement of the product business on our side - contributing to New Zealand dairy losing market share in China, and damaging the New Zealand product brand in other sectors. It's a country and culture in which second chances are rare. First Fonterra fell over its feet with Sanlu. Then came 'botulism', and as the comprehensive study published June 2014 in The International Journal of Production Economics stated, Fonterra's experience 'did not appear to be helpful' in dealing with quality/safety problems. Meaning Fonterra didn't seem to know what it was talking about in an issue of critical importance.

Regarding the deployment of debt, certainly much of it was ticketed to capital gains (farming for capital gain has been a promoted strategy), but much has also gone into new, expensive inputs - such as irrigation - to support dairy expansion and intensification. Again, because China would supposedly take the lot, and willingly at New Zealand prices.

The banks are culpable, as are those who took the money. But retail banks do not understand business. They understand tangible asset values. And too few farmers and farming advisers and organisations appear to understand business. MPI, MFAT plainly do not. And we have a government cheer-leading wealth creation via capital gains - as in housing.

The result, certainly, as farms go underwater, is a massive exercise in wealth redistribution. But I think it's possible to credit bankers of all stripes - central, investment and retail - with more deviousness, or even intelligence, than they have. Extremes of unprincipled greed, certainly, as evidenced In the GFC. In the main, though, we see the blind leading the blind. The difference is, as you point out, that the bankers and their friends - the global elite - run the system. And thus the greed has prospered.

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Stephen, I've oft read you mentioning the redefinition of inflation by central banks as the means by which the massive wealth transfer we are witnessing has been implemented. If you read this and have the time, I'd be interested to know what the earlier definition of inflation was and when it was redefined to the type of formula used today.

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The creation of the restricted CPI type benchmark to specifically control wage costs in the bad old days. In 1983, I believe the US removed all vestiges of shelter asset values from the equation. The adoption of hedonics to modfiy rising prices because of perceived increased function. The Japanese regularly dropping rising price items from the index to be replaced by lower priced equivalents. I am sure there are more if I spent time researching the changes. Basically everything is/was manipulated to contain the cost of entitlement transfers to the poor and retired dependent on public goodwill services, including annual wage increments.

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Thanks - got it. "CPI manipulation" as a search term produces lots of info in follow up.

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Economists have long used lower price alternatives as this is how a consumer will swap spending if an item becomes too expensive. Items also fall out of importance and others grow, hence the CPI has adjustments made. Housing is of course not a CPI item day to day so dropping it out because its not helping with what you are looking for is perfectly reasonable. It is hardly a conspiracy, until of course the last few years and thethe issues we have now are with us. Meanwhile the Austrians/right wingers use any and all ammo not to see interest rates drop, I have yet to fathom why they think so oddly as not doing so weakens the economy even faster.

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Don't be stupid - the financial credit resources dedicated to speculating in the global $200 trillion debt market caused by falling interest rates is super deflationary. Once again, I point you to the reality of my previous life making absolutely unwarranted fortunes for my bank employers, funded by increasingly poor taxpayers and company shareholders paying out higher percentage bond coupons on higher priced bonds caused by lower market yields. Read more

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@kate...I was always lead to believe that inflation is an expansion of the money supply, which isn't hard to realise when you google NZs debt clock and see how much debt NZ has and how quickly it expanded while National have been in government...

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hence low interest rates artificially high asset prices...sort of like a suckers bet...

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Bernard - "Think Big"

The One versus Many trap
Muldoons "Think Big" involved 5 major projects that involved 5 major businesses (the few) whereas National's aspirational "Think Big 2025" involves (the many) and has sucked in many small fry

If Muldoon's plans didn't work few people were harmed (discounting the ultimate cost spread over the taxpayer)

If National's 2025 plans don't work out they will have hurt the many who have been seduced into believing the dream, and who will ultimately be underpinned by the taxpayer - because when bankruptcy comes calling, operations cease, production stops, exports decline rapidly, which in turn harms the country, which in turn harms the taxpayer, again. Govt is already pressing the banks to evergreen the debt (soft bailout)

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It's the debt stupid

Working through the NZdairy costings (link supplied by Casual Observer last week) provides a revealing insight into the profitability of the dairy industry

Generally, across the country, on-farm production costs are $2 kg rising to less than $3 kg for larger intensive farms. Which means most dairy farms in NZ are profitable production-wise on a MS payout of $4 kg, and continuing operations are contributing toward overheads

In order for a dairy farm to be under water at a payout of $5 kg their overheads must be enormous

None of the results disclosed any details of the overheads in the examples given which use an EBITDA (earnings before Interest, Tax, Depreciation) methodology. Guessing, but the largest part of that $3 kg (minimum) of overhead would probably be Interest on debt

The other worthwhile takeout was, the larger intensive farms appeared to be less profitable than their smaller counterparts as additional labour, bought in PKE and other supplements were employed

And the winners are The Banks

National's Think Big is simply a back-door leg up for the banks

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You nailed it iconoclast. And it's a good article Bernard- It's scary when you add some logic to simplify a situation.

The old rule on borrowing has now fallen out of bed with the change in cost structure:

Remember for years, if you worked on debt servicing at 25% of Gross Farm Income (GFI), then at $6kg/MS + 50 cents for meat and 5% interest, a bank is happy as with debt of $32kg/MS. But at $3.90, the figure drops to $22/kgMS Debt.

But this ratio is now redundant as Farm Working Expenses (trimmed) can now vary from $3.20 to $4.50kg MS.

As farmers always ask the same old question "how much can I borrow?" the availability of money drives land prices. And the answer to helping farmers out in such times has always been the same - "Haircuts". In 1935 the 1st Labour Govt allowed 2nd mortgages to be wiped, in the late 80's, the Govt owned Rural bank selected some of their clients (mainly younger farmers) to get loan discounts.

If the current situation comes right next season, many farmers will have dodged a bullet, if we have another 18 months of such prices, there will be a realignment of land prices. If it lasts beyond that it will be carnage.

While this is not the doing of central government, some clear signals need to be sent out to banks that the solution lies with them. After all, it was created by the greed of bank execs and farmers. The options would be either the banks take equity shares, or offer haircuts or both. If they start a whole selloff, then the threat can be made to reintroduce the Land Tax (ended 1950).

The government has then set out the rules by which the banks can play by, and farmers can have an idea of what their options are. We had a brief insight of what could happen in 2009 when a lack of credit meant when a small number of farmers had to sell, with land prices down by abut 25%.

We cleverly try to blame other factors, such as marketing etc, but these are all small fry. Remember the last year of the Dairy board resulted in a stellar payout of $5kgMS. The first year of Fonterra and the payout hit $5.30kg. But the second year it was $3.65. The lesson was "market forces always trump selling/ownership structure".

Mind you, as when we had a low payout soon after the formation of Fonterra, it does wonders for improving your quality decision making, if nothing else.

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The debt problem is largely created by the tax deductibility of interest payments as a business expense. That's why I think Bernard is a fool to like capital gains tax. The capital gains tax issue is a red herring which serves to distract useful idiots from this (to use Stalin's rather apt turn of phrase).

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Thanks iconoclast. Good to have an impartial review of dairy costs based on actuals rather than 'models'.

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Effectively this is the free market in action. ie this is rinse and repeat for lots of "business endevours" Price high lots rush in only discover lots have rushed in as the price plummets.

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Marx was right - capitalism is based on boom - bust cycles, it's uncomfortable for people to hear but suck it up people - you are not as intelligent as you think you are.

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Not sure I can take seriously someone who states, "Marx was right".

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Why.... have I touched a nerve.... I said it was uncomfortable, but your statement shows a lack of understanding of what Marx said and I did not say his solution was correct, only his analysis of the capitalist system was correct.

I think it is an inconvenient truth for those who pray at the holy alter of capitalism.

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Why.... have I touched a nerve..

I don't have nerves on these matters as I hope is apparent in the tone of my comments. Fifteen years and counting of hard fighting on political blogs has hardened me. Good to see you are not a Marxist. Sometimes I think this place is NZ Bolshevik central.

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Your comments are too harsh. Please use more appropriate tone.

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Here is a list of the five reasons Karl Marx gave as to why everything that isn't Socialism will fail:

1. Inevitability of monopolies, which eliminate competition and gouge consumers and works.

2. Lack of centralized planning, which results in overproduction of some good and underproduction of others, encouraging economic crises such as inflation, slumps, depressions.

3. Demands for labor-saving machinery, which force unemployment and a more hostile proletariat.

4. Employers will tend to maximize profits by reducing labor expenses, thus creating a situation where workers will not have enough income to buy the goods produced, creating the contradiction of causing profits to fall.

5. Control of the state by the wealthy, the effect of which is passage of laws favoring themselves.

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Marx was following a hidden agenda. The last person who would have followed Marxism was Marx himself. That's all you need to know about Marx.

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Both the left and right follow hidden agenda ... holding on the power once they obtain it. It's strange that both the left and right if they go to extremes end up with very similar types of government. Repressive, constantly on guard against "subversive elements" - real or imagined, death squads, secret police - almost as if they are scared of someone having an idea that is contrary to theirs......

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Governments love to control. Some want to be paid for it, some extract payment in other ways. Have your pick.

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You don't have to be left or right to learn something from Karl Marx. He explained in detail how 'the benefit always flows ultimately to the owner' That insight did not cause me to rail against owners. Instead I became one. It has worked very well. Don't close your mind.

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But it does depend on what you own - dairy farms don't look so hot these days - nor oil - diversification is the key.

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Interesting. When analysing farming you need to remember that the cost of the land is the biggy and that for a simple grass based dairy producer the EBIT costs are about $3.5 per kg. The big cost is the funding of the land to enter which is very different from the normal business which is small cost to enter and larger operating costs. Thus there is some justification for borrowing heavily to buy a farm as long as the buyer realises that there are very high fixed costs involved and very variable incomes. It has always been so and always will be with farming.

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Interesting. When analysing farming you need to remember that the cost of the land is the biggy and that for a simple grass based dairy producer the EBIT costs are about $3.5 per kg. The big cost is the funding of the land to enter which is very different from the normal business which is small cost to enter and larger operating costs. Thus there is some justification for borrowing heavily to buy a farm as long as the buyer realises that there are very high fixed costs involved and very variable incomes. It has always been so and always will be with farming.

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BH the real live issue is the one where markets can swing fast and that one should always be prepared for that swing when planning ANY investment.

Governments should keep their noses out of investing in any industry. As soon as any Government starts investing in a certain industry that industries prices get distorted.....more players jump on board and this pushed land prices higher.....the longer this practice goes on the bigger the distortion as more and more players hop the fence and start investing! It is not rocket science it is part of the market......the choices are keep politicians and bureaucracies out of business or cough up the taxes to pay for the Government spending blunders!!

DC above used the "Pine Tree" example above....again Government got involved in forestry in NZ and all sorts of people followed by investing in this industry....driving prices higher...

Socialist NZ'ers like the Government owning assets and investing in assets and the only reason they like this ownership and investment is it gives these individuals who lack financial and accounting skills some sort of sense of personal ownership and then these same people don't understand the debts, the markets or other issues that go along with owning assets.....so when things go wrong they can then accuse that Government of poor investment or not looking after the public purse carefully........and you wonder why I go on about socialists and Government and bureaucracies and constitutional rights!!!!!

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Cashflow vs Capital increase. The first is for investors the latter for speculators. The first creates value, the second creates bubbles. Repeat story across businesses and economies. Governments encourage such things with tax laws, budget support, etc. This story won't go away or end ever.

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Very true. And the worst aspect of this vote-winning scheme are the stupid constituents who keep voting for it.

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Debt, this morning played around with the RBNZ mortgage reconciliation numbers. Astonished that in the December 2015 quarter, scheduled repayment of debt would take 54 years , in December 2014 only 43 years. Why would those numbers diverge so markedly. Interest only loans were a scurge in the United states , in New Zealand they will become a pestilence

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One compensating factor for these fallen dairy prices was supposed to be the magic of a drop in foreign exchange rates. However that becomes difficult when the foreign money keeps flowing in both from the foreigners who stay away except for their cash and the roll on of cashed up immigrants.
The GDP may rise in total but fall on a per capita basis and the dairy farmer ain't one razoo better off.

Makes Jonkey and Bill No Surprises English happy.

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OBVIOUSLY THE MORE YOU PRODUCE OF SOMETHING THE CHEAPER IT MUST BECOME.
Sounds like a PONZI scheme or an old style PYRAMID scheme.

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...and this could be the reason that the Velocity of Money isn't happening which is impacting on a persistent low inflation rate? Deflation really. Money isn't circulating within the economy due to speculation in the housing market where it gets tied up in proprieties and banks & farm debt? The Governments 40% appropriations/fiscal policy & money drop(s) misdirected to the wrong areas of the economy? I think this governments got 3rd term -itis ... time for a change.

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Interesting to see the three main opposition leaders presenting a united front in regard the dairy situation on 'The Nation'. Seems they are all broadly in agreement that some sort of govt support is going to be necessary to avoid massive economic fallout, contrasting with Bill English's" nothing to see here" position. Politically the govt are going to get dragged into this whether they want to or not.

The govts (of all colours) hands are not clean here they have created the playing field that farmers have been playing in with regard tax regimes and overoptimistic forecasting of the fruits of free trade agreements and business growth agenda's. That some farmers and speculators have been influenced by this is hardly a surprise.

Regardless of the politics the banks need to front up here as well. They are completely culpable for over lending based on incredibly inaccurate payout forecasts and wreckless lending models. The supply response from the EU from the elimination of quota's was well signalled and the banks with all their analytics got it horribly wrong but it will be rural communities that pay..

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Nahhh ... let them fail - what about individual responsibility.

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Once John Key finds out that he has a dairy farm investment in his BLIND TRUST the bail out will commence.

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How cynical.... :-)

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Sheep Shagger your claims that the government and banks need to intervene is a direct contradiction of those the PM made in the past.

"Dairy is 5% of our economy. So yes dairy prices are down and it's tough on those dairy farmers who are resilient people, but 95% of our economy is not involved in that." Read more

So why are bank depositors constantly taking hits to their incomes for being staunch OBR capital (~$150 billion) underwriters of the farm and other debts the banks have created? Could they be excluded this time since they are RWT tax payers at source and have already made a significant sacrifice.

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Stephen, I haven't said the govt should intervene, im merely observing the opposition response and adding my view that politicians "of all colours" have contributed to the impending mess.

My real contempt is for the banks who have not heeded 2008 warnings and continued piling the sector with debt based on extremely inaccurate forecasting. Yes(some) farmers are to blame for buying into the hype and should face the consequences but they were aided and abetted.

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At a bank function recently their speaker was saying that farms won't devalue by 40%. They believe that it will be more likely to be 10-20% because there are many foreign buyers in the wings waiting to scoop up farms. The largest group of attendees were non dairy and when it came to question time some of the hardest questions were being asked of the bank, about dairy, by the sheep/beef farmers.

If the government bailed out dairy farmers, no lessons would have been learned.

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C/O is was also at a bank function recently(maybe the same one?) and can report similar sentiments. I think the reason sheep and beef farmers are so critical of the situation is that those of us left have often been the ones who didn't believe the hype, particularly around land pricing levels. Subsequently we steered away from getting involved but still feel a degree of sympathy for those that did based on the forecasting,backed by easy money, being delivered from all angles.

I agree individual farmers should not be bailed out but I would expect Fonterra will be a different story should it come to that. I do suspect the govt will end up giving dairy farmers some sort of token relief package akin to the drought relief if things do get really dire just to calm the electoral horses.

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Why would foreigners want to buy a dairy farm - first they have to get past the overseas investment commission and second the slump in dairy prices ( and no matter what any body says it could be next year or ten years or never before the prices improve - personally I think they will improve but not back to the levels they were before).

Any foreigner would need a good business case before they invest in dairy. I don't think that is going to happen any time soon.

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You would have thought that gfc might have been a red flag and yet the debt went up another 8 billion
What's the banks criteria ? I know of farms that had poor cashflow because of droughts and yet good equity being targeted aggressively ,

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Time for the penny to drop that NZ isn't a dairy farm, but a bank product sales bonus sucker farm.

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In my opinion the tipping point was the Crafer farm sales.When the Chinese & our beloved Landcorp bailed out the banks in the Crafer fiasco then instead of a reset and the banks taking a haircut..all of a sudden it was business as usual ..."Sell some more debt boys we are in the clear.."

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Yes everyone had their warning in 2008. Most NZers stuck their head in the sand, but before doing so said 'wots a gfc?'

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Dairy or the Banks, which will need the bailout first ?

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banks will be bailed in...not out..beware depositors/savers...

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What the next government might do about the dairy downturn
http://www.nbr.co.nz/article/what-next-government-might-do-about-dairy-…

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Thanks AJ...good link how bout that Billy Bob eh?

On the same programme, Bill English ruled out any bailout or other form of assistance for farmers, many of whom won't make any income this year as low dairy prices persist.......................hmmmm I say a plan b has already been tabled for John Boy n Billy Bobs eyes only..!

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There are five groups involved in this cluster.
Farmers, Fonterra, banks, government and the NZ tax payer.

Ask yourselves who caused this bollocks, (Clue - 4 of the above) then ask yourself who is going to pay for it. (Clue - 1 of the above)
It will be GFC all over again where the bankers who almost went to the wall with their cunning ideas were bailed out by the tax payer and then one year later the same rogues were rewarding themselves with massive bonuses again when most of them should have been spending time in a small room with bars on the window..

This will cause pain but will be dwarfed when AKL goes bang as well. Its the same story, slightly different timeline.

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"Clue 4" you're blaming the Govt ?

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Didnt the Govn have/has a policy of more dairy?

if not then what the heck is this?

http://www.radionz.co.nz/news/national/298847/call-for-five-year-ban-on…

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Bernard is softening us up for Wheelers Diary Stress Test report which is due out any time now

I fear that Diary is NZ's subprime... it wont be contained but will spread, AKL house prices also have to adjust if cap gains disappear.... they need to be yield based... perhaps a 30-40% correction from where they are now.

The rock star seems to be falling over ...

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Just.....have....to....keep....it......going...til.....the....election....

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But the damage is already done - I think NZers are waking up to the fact the problems in the dairy industry are serious and that the government don't have a clue ( how many times has John Key said the dairy recovery is just around the corner) - and it hasn't happened. And then last week.....

I am sure there must be some research on the accuracy of economist predictions - I assume it is poor - but stand to be corrected. I'm not talking about the next GDP figures or whether the Reserve Bank will cut or raise the OCR ( generally that's a toss of the coin - 50/50 chance of getting it right). I mean meaningful long term predictions.

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I think you'll find an economists ability to accurately predict the future of an economy would only be matched only by a share brokers ability to predict the future of the share market.

The latter was researched by Nobel Prize winner Daniel Kahneman (see book 'Thinking Fast and Slow) and they found that a stock investor picking ticker codes from a hat would have a much success as the typical stock broker does - without the need to pay his/her brokerage fees.

My personal opinion is that it is the economist who is most disliked for his/her views by the general public is most probably the most correct.

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I am sure his diary will be well stressed. NZ Dairy on the other hand - "everything below the waist is kaput"

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Imf been warning of this for ten years , and all the rating agency's , still

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That's true MarcF but they sugar coated it......it's only now they are shouting "the horses are bolting"

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banks will just become land owners having swapped nothing for something.

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Wasn't that the plan - turn the debtors into peons?

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If your right I expect the Banks to start offering staff courses in Milking and Tractor driving.

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English was quite relaxed on the Q&A interview about the banks having the capacity to easily absorb $5-6b of dairy debt write offs if necessary. That would seem the tip of the iceberg given that the remaining collateral could be heavily devalued. Will be interesting to see governor Wheelers perspective. Given his abrupt u turn on interest rates he must be seeing red warning lights flashing at mission control.

I just cant see the Auckland property thing going bang to any great extent while interest rates are at record lows , immigration at record highs and unitary planning reform is in disarray.

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I suspect Wheeler was pre warned about a number of things before the OCR cut. About the Auckland house prices - you are most likely right - they will reach a point where they stagnate - and then something will change - either migration will reverse or interest rates will go up and then......

Planning in Auckland ( ROTFL) ... I think that will be permanently in disarray. In Christchurch however I think it is a different matter. Looking at a CCC / CERA mailer I noticed that a new area in Selwyn has been designated a "special housing area" - 113 hectares or 1300 to 1500 new sections and that is along with all the other existing subdivisions. I just wonder what will happen in Christchurch.....

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His "stress" test assumes that prices stay where they are... not get worse... not that full of stress.

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If so why even bother doing a claytons stress test?

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Hmm, let me see if I've got the gist of who is to blame here. Govt., farmers, banks (central and retail). When do we admit that the money system, the banking/debt system, economic theory are faulty systems? When do we admit that being rich and wealthy and defining it by possessions and money may actually be the cause of all our issues?

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On of his criteria is flawed - swings in price by more than 50% over a two year cycle?, actually the price payout started going up in 2006/07 and didn't stop until 2014. He also omits to mention that farmers neglected to consider that their primary marketer of their product was also selling their technology, through "joint venture partners" and other potential competitors all over the world. In essence they were selling the farm. what did they think would be the outcome of such a strategy? Even the so called experts, the rural bankers couldn't (or wouldn't) see the fly in the ointment. I worked a season in the dairy sector in 2007, and could see what was going on then, and couldn't understand why others either couldn't or were ignoring it. I thought they must have known more than me, as I was just an ignorant townie, playing in the milking shed and applying what I thought was common sense.

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I've been concentrating on my sector and haven't had time to look at dairy. I never realised everything was just a giant pile of debt in relation to Fonterra. Nor did I realise they were giving away our engineering technology like a bunch of suckers. Even if they didn't give it away someone would copy it as has been done frequently in the past.

It's sad to see this is another think big but with most of the debt likely to bury a number of farmers financially. Too much debt and too much leverage.

What if the PM is wrong (as he frequently is) and instead of 10% of farmers going broke it's instead 30-40%?

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What if the PM is wrong , he is never wrong he just forgets he says certain things and the leemings will follow him off the cliff.
i have no doubt they will step in to save fonterra, they are just saying what needs to be said now,
and when they do step in they will twist it to say we did not say we would not help fonterra if it gets in too much strife only that we would not help out farmers

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The bloke I worked for had a mortgage slightly less than $3 mil. When the pay out hit $4.00, and then $4.50 he thought he was on the pigs back. I suggested that it was a great opportunity to get rid of his mortgage, and he laughed at me and borrowed $120K to buy a brand new tractor, which he didn't need(IMHO). He spent a lot of time wingeing about the regional consents required for water, and the changes on the horizon for this. But when I pointed out how much water was wasted on his farm and how little it would cost to improve on it he just got pissed off, and said I didn't know what I was talking about. Gave up working for an idiot with too much money and not enough brains, and one of the worst employers I've seen or heard about after one season.

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The Dunning Kruger Effect is quite common in New Zealand. It's unfortunate that there are so many people that have no idea what they're doing.

Spending money to reduce water use and save a large amount of money? Nah, that sounds like work.

During the good times it's a great time to pay down debt as you say. Even right now with the interest rates so low it's a great time to pay down debt. Unless you bet everything on a single commodity and are running an unprofitable farm. It reminds me of every pub story where someone says "I used to have it all."

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The only people who have money are those who don't spend it unless they have too - they old lady who uses a shopping bag as a hand bag ... she dies and you find out she's worth millions....

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So.... when is One Dollar Bill going to explain why Auckland PI's need to function like a proper business and focus on cashflow, not capital gains?

"This is an industry where they've had a focus on growing equity and growing property values for quite a long time now. It's going to be a significant adjustment to getting back to the core business of investing for cash flow," English said. "They are going to see property values drop. That is pretty much certain," he said.

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In an interview with the Herald, Reserve Bank Governor Graeme Wheeler said its worst case scenario was that farm prices could fall by up to 40 per cent and banks have to write off up to 15 per cent of the $40 billion in loans if dairy prices did not lift within three years.

I can imagine a worst case scenario.... lets try an analysis moving with price moving +/- 10% increments in EACH direction. Yes things could get worse, Buckle your seatbelt Dorothy, 'cause Kansas is going bye-bye!"

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Gosh you guys are negative. Try living in the third world. Most of us have three square meals a day. We do my know what a hard life is.

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My friend an accountant who audits dairy farms, told me 5 years ago they dont operate as a business but are farming land gain. So then...
The banks knew this but continued to hard the dairy loans.
So then..
They were hard selling money to a business based on land going up.....
What??

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and it looks more like, 'lower for longer' the most likely scenario.
>>
EU predicts 'further milk price falls', as output growth continues

However, the commission said that the rise in world supply was "not only due to EU quota expiry".

From 2007-15, US milk production rose by 12% and New Zealand output by 36%, well ahead of the EU increase of 10% over the same period.

>>
Now like all rainbow chasers they will head into the beef market while it's at all time highs, just in time to ride that wave into the ground.

http://www.beefcentral.com/trade/sharp-turnaround-in-us-imported-beef-m…

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Indeed look at oil, its gone a lot lower then anyone could have guessed

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@Gordon

Based on the current NZ culture of greed and excess, a 'hard-life' isn't measured by the number of meals you get to eat in a given day, but instead the number of rental properties you can (or cannot) purchase a year! The whole situation gives me indigestion...

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Ok,
I understand, farming is a Ponzi scheme, by accounts it is very easy to borrow but hard to sell and dodgey paying off the loan.
To give the "investor" a way out involves a new use typically more intensive with the risk of further pollution.
That only leaves tourism...

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You are all chasing/pushing each other over the cliff trying to be more depressing than the last.
We are farm owners - both dairy and beef. We started 5 years ago. Each purchase has been solely based on a CASH return on investment and we are paying our way. Yes we looked at a lot of farms to find ones to meet our criteria and yes none of them are in the Waikato or Canterbury but we have not had to borrow more money from the bank to stay afloat nor do we intend to over the next two years. Hell yes it is tough and the volatility is greater than we expected and we have friends much worse off -but we made the decision to go farming and when the Fonterra payout was high the family had an overseas holiday and now its tougher we just have to suck it up and get on with it and maybe think outside the square on how to succeed.

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the odds are that there are a few farmers operating off a sound business model, but at the moment there may well be many more who aren't. The good ones will not have bought in to the banks clap trap about borrowing more against an appreciating farm value. Having said that though, your synopsis indicates that you will have paid top, or close to top dollar for you farm, for the time, and if you didn't borrow against an appreciating farm valuation, you might just scrape through if your business model is well thought out. On that basis I wish you well. It is unfortunate that so many were not sharp enough to see the train coming....

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murray86 There are many farmers who are operating off a sound business model - more than those that aren't. But you don't hear about them - good news doesn't sell. That said, those that are in strife are likely to have a large part of the dairy debt - but that doesn't make them the majority of farmers. ;-)

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Good to hear some positivity about dairy Wilco. :-)
Most of the negativity on here comes from the mainly non dairy commentators. I have recently seen realistic budgets of sharemilkers and young farm owners showing very positive cashflow at a payout of $4 - without additional borrowing.

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Yes it is refreshing alright.

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As you say it is good to hear that there are farms being run as sensible businesses. Where I get concerned is if more than 2-5% dairy farms fail financially. That percentage is in the normal range where there's financial management or someone has had a bad run mixed with poor timing and there are failures. I hope that the number doesn't exceed that or it starts having a detrimental effect on the communities and the country as a whole.

Other than that concern I was unaware of how much borrowing was done by the Government to set up Fonterra. I'm blown away by the figure. Let's hope this doesn't turn into Think Big 2.0

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Mmm...can you explain how the government borrowed to set up Fonterra? My recollection at the time was the it was a merger of dairy cooperatives and the Dairy Board in to one.

edit - is not the borrowing Bernard refers to that which farmers have borrowed, not the govt?

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Maybe I've misunderstood the reference to NZ Inc investing $30b in this article. If the government didn't borrow that money and it's a reference to private lending then why the next paragraph state $40b in farmer's debts.

e: if it's all farmer debts that's more of an issue as this can become a bank stability problem (a worse problem than government debt). That would explain Bill English and RBNZ commenting. Too bad the article has two different sets of figures confusing the issue.

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both my farm investments had no debt but we will below cost this year and running up a small amout of debt to see us through, in saying that a lot of expenditure has been cut so a lot of support industries will be hurting too
as for how long it will go on for who knows,

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sharetrader - Are your farms owned via a syndicate or do you own them outright?

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owned via syndicate, we have lower order sharemilkers on them and had no debt until this year.
we can ride it out for a few years them pay back the debt

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what's a lower-order sharemilker?

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That is good to hear CassO and no doubt why Billy Bob's saying no bailouts as the proverbial hits the fan for those who did NOT understand the business plan to leverage and retool as sold to them by third parties. Those(Banks) who financed a lot of such ventures must either have bought into the business plan .........know something about land values the rest of us don't.............or genuinely believe all debt can be socialised as the fan makes irreversible contact.

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Thats right. The farms are not broken.
We can and am getting back to cost structures from 10 years ago, and living ok at fgmp of $4 flat.
Bank debt driven finance structures will not allow some.

We don't see all dairy farm values dropping in half for instance, its a case by case situation. If the dirt can go to crop or potatoes....
Although we've seen the surprise of bankers when they realized how far out of operating wac their well geared client portfolio are in the low fgmp environment.

At this time the issues seems mainly one of poor underwriting or poor lending criteria by the debt providers. Eg the loan problems are not poor farm performance to loan offer terms - it is the milk price loan assumption - the bit the borrower didnot suggest.
.
Sure we can talk govt. policy mis steps , market opportunities lost or Fonterra doing better (thats the business of the ss shareholders). But these are all things that a seasoned lender would otherwise factor in to a lending decision (and policy dictated/ allowed by the 5 respective heads of credit)...

The real test will be if as a group people ( for NZ Inc is an undefined thought bubble) we sort the mess out by dealing with the reality we have before us and not indulging the self importance or face saving.

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And all the more interesting round the dinner table with those 5 heads of credit.

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This is what happened in Texas as the oil market turned on them, its a warning for Dairy

http://www.bloomberg.com/news/articles/2016-03-08/the-texas-towns-that-…

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Please advise if Mr English still has a dairy farm in Dipton, Southland. If so how many, if so, what vested interest does he have in maintaining an even keel.

Or is it just sustainable from his current paycheck. What will happen if Labour win, next bout.

Just asking??.

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Bill's farm is now run by nephews I believe. Wouldn't know if he has any money still invested.

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Thanks...SS...For the info....I hope he does not have to cry...."Uncle'..like so many others...I trust, it is all wound up in a trust.. with benefits, and not need winding up....in the poo.

Muchus grassyass.once again... Mr Shepherd...or is it.. Mr Ramsbottom. ...or are ye just an Aussie import....or is it just a home grown non-de-plume.

Just asking...once again.

(Mr editor...I hope you can see the funny side of life, nothing personal...just my Alter Ego...wittering on, with due cause ...again, we need a laugh...and I am idly curious...today.).

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Silly govt. Silly Landcorp.

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