Jenée Tibshraeny looks at the key government and Reserve Bank policy changes underway that impact dairy farmers, accompanied by a healthy dose of context

Jenée Tibshraeny looks at the key government and Reserve Bank policy changes underway that impact dairy farmers, accompanied by a healthy dose of context
Image sourced from Pixabay

Rumblings from the dairy farming sector are becoming increasingly loud, as both the Government and Reserve Bank (RBNZ) make policy changes that affect the sector.

New Zealand has for years milked its white gold for all it's worth - milk powder, butter and cheese comprising about a quarter of the country’s merchandise exports by value.

But the effects of a period of intensification on both the environment and banks’ risk profiles have come to a head.

Regulators are making changes, and naturally, many of those affected aren’t happy.

However, with National and NZ First becoming more aggressive in their battle for the rural vote as Election 2020 approaches, and the powerful agricultural and banking lobbies joining forces against the RBNZ in relation to its proposed bank capital rules, the space is getting very noisy.

It’s increasingly difficult to differentiate between valid problems and pure resistance to change.

In an attempt to address some of the concerns being aired, interest.co.nz has summarised the major policy changes underway and provided context around them.

We have simply detailed some of the facts and will leave you to draw your own conclusions.

The concern

‘Farmers will bear the brunt of the looming credit crunch.’

The policy

Retail banks will most likely be required to hold substantially more capital further to a RBNZ review. If the outcome, to be announced on December 5, prompts banks to restrict their lending, dairy farmers are likely to be among their higher risk borrowers affected.

The context

Banks have in recent years been reducing their exposures to the dairy sector, having lent up a storm in the past.

However it’s difficult to know the extent to which the pullback is being driven by looming capital rule changes.

The value of dairy loans as a portion of total bank lending (household, business and agriculture) has fallen to 8.8%, from about 10% in September 2016, according to Reserve Bank data. Unfortunately, the data set doesn’t go back further in time.

As of September dairy debt stood at $41.249 billion, comprising the bulk of total agriculture debt of $63.867 billion. However, dairy lending growth was near-stagnant as at March 2019, and has been drifting lower this year from $41.719 billion in January.

RBNZ Governor Adrian Orr last Wednesday said the areas where banks over are overexposed to dairy are narrow, yet deep. He said some farmers would “struggle at current levels”. Global dairy prices are perky and the low New Zealand dollar is making New Zealand exports attractive on the world stage.

In September Orr said over the previous 12 months, as the RBNZ had been working with stakeholders on its capital proposals, it had reduced the Official Cash Rate by more than the banks’ estimated costs of the higher capital requirements. Yet some sectors of the economy such as agriculture had seen their borrowing costs rise. This, Orr suggested, could only happen if banks were "significantly raising" their margins.

The concern

‘Too much productive farmland is being converted to forestry.’

The policy

The Government, in October 2018, introduced a special test to provide a streamlined consent pathway for overseas investment in New Zealand’s forestry industry.

The rule change aligns with NZ First’s One Billion Trees Programme.

The Government is stumping up $240 million of funding to encourage more tree planting. The goal is for the current planting rate to double, so that a billion trees are planted by 2028.

The context

Between 2002 and 2006, the amount of land converted to dairy increased in every region in New Zealand, except for Taranaki. In Canterbury it increased by 155% and Southland 158%, as per this Stats NZ graph.

Of the 27 consents (covering 73,200 hectares) the Overseas Investment Office issued to overseas forestry investors between October 2018 and September 2019, 12 consents (covering 14,300 ha) will include some farmland being converted to forestry. A hectare is about the size of a rugby field.

The Government also announced in October 2019 that overseas-owned Pan Pac had received pre-approval to make forestry-related purchases of up to 20,000 ha, including conversion of land from farming to forestry.

The concern

‘Cows will need to be culled for NZ to meet its emissions targets.’

The policy

Targets of reducing biogenic methane emissions to 10% below 2017 levels by 2030, and between 24% and 47% below 2017 levels by 2050, have been legislated under the Zero Carbon Act.

The context

Modelling done in 2018 by the Biological Emissions Reference Group, which includes New Zealand agricultural and government representatives, found widespread adoption of currently available mitigation options (primarily farm management practices) could see biological emissions fall by 10%.

However the group noted: “The ability of farmers to implement such practices varies widely, and while some farmers might achieve such reductions without significant negative impacts on profitability, for others the impact could be large.

“A greater than 10% reduction in absolute biological emissions will likely require a combination of on-farm mitigation and land-use change.”

The group also concluded: “Modelling indicated that when all mitigation options assessed by the New Zealand Agricultural Greenhouse Gas Research Centre are combined into packages, and assuming various rates of adoption of each practice by farmers, overall biological emissions in the future could potentially be reduced between 10% to 21% by 2030, and by 22% to 48% in 2050, relative to Ministry for Primary Industries baseline projections.”

The concern

‘Farmers are going to be paying amounts through the roof for emissions.’

The policy

Farmers have been given until 2025 to come up with their own way of pricing agricultural emissions at the farm level.

If they don’t show they’re making enough progress, they could be brought into the Emissions Trading Scheme (ETS) as soon as 2022. If this happens, they will receive a 95% discount.

The context

Agriculture is responsible for 48% of New Zealand’s greenhouse gas emissions. Emissions from the sector increased by 14% between 1990 and 2017 - less than the industrial process and product use sector, which saw an increase of 39% over this time.

While the price of emissions under the ETS is expected to increase substantially over several years, at the current price of $25 per tonne of carbon emitted, the Interim Climate Change Commission estimated the average dairy farmer would pay 1 cent per kilo of milk solids.

Put in context, Fonterra’s 2019/2020 forecast Farmgate Milk Price is $6.55 to $7.55 per kgMS.

Presumably, whatever pricing scheme the agricultural sector comes up with, will be cheaper than this.

The concern

‘Water reforms are going to cost tens of billions of dollars.’

The policy

The Government is proposing to make a raft of legislative and regulatory changes by mid-2020 to clean up New Zealand’s waterways within “a generation”.

It is considering restricting farmers from using new irrigation schemes or converting to dairy, unless they can prove this won’t increase pollution. It is also considering introducing tougher rules around fencing to protect waterways from farm runoff.

The Government wants to “tightly restrict any further intensification of land use through interim measures until all regions have operative freshwater management plans”.

It is also looking at ways of changing the Resource Management Act, updating the National Policy Statement for Freshwater Management and the National Environmental Standard for Sources of Human Drinking Water, and introducing a new National Environmental Standards for Freshwater and Wastewater.

The context

The Ministry for the Environment has provided a number of statistics that paint a bad picture of the state of our waterways.

It estimated the amount of nitrogen leached from agriculture increased by 29% between 1990 and 2012, primarily due to an increase in nitrogen fertiliser use.

It also said New Zealand has lost 90% of wetlands to agricultural and urban development, meanwhile between 2006 and 2015 there was twice as much deforestation as afforestation.

However industry group DairyNZ maintains the Government's proposals are “so severe that the net result is a significant economic loss… potentially without the environmental gains they are hoping for”.

Its modelling suggests that by 2050, total milk production will fall by 24% and all exports by 5.2%.

It has put an $80 billion price tag on the proposed water reforms over 30 years.

An independent advisory panel is currently going through submissions on the proposals and will report back to the Government.

*This article was first published in our email for paying subscribers. See here for more details and how to subscribe.

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56 Comments

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Omitted:
The Concern
Techniques that address pest control, emissions, and animal/plant/tree productivity are widely available but unused. Gene editing, gene drives, CRISPR-Cas-9 etc.
The Policy
Verboten/Haram/Taboo because Shut Up.
The Context
All discussion about any of this currently lies outside the Overton Window.

Couldnt agree more

"because Shut Up."

So true!

Soil organic carbon can be added to the Verboten Shut Up list too.

A huge mid canterbury horticulturalist I know tells me that intensive dairy land adds 5-10mm of top-soil per year, and that after a couple of decades becomes more valuable for horticulture than dairy - so intensive dairy is to some degree a transient industry. Intensive dairying is sequestering carbon like crazy - something like 0.1kg/m²/year.

Winter grazing of dairy cows is practised in Central Otago for that exact reason. Non dairy take on winter dairy grazing for around five years and their pastures are light years ahead of where they would have been without dairy grazing.

From US study in beef grazing 6kg CO2 sequestered per kg live weight gain. "After including SOC in the GHG footprint estimates, finishing emissions from the AMP system were reduced from 9.62 to −6.65 kg CO2-e kg carcass weight (CW)−1". "Generally, because of their large enteric CH4 emissions, grazing systems have been pointed to as the greatest area for attention for decreasing the GHG footprint of beef production. However, measurements of SOC have not typically been factored into these outcomes."
No wonder the anti farming/chicken little brigades are desperate to ignore soil organic carbon.
https://www.sciencedirect.com/science/article/pii/S0308521X17310338?_rdo...

"intensive dairy land adds 5-10mm of top-soil per year"
Interesting..Any references for this?

Oops

... given that the public has voted the Yellow Eye penguin as the nation's bird of the year ... it behooves us to plant a few tree species suitable for this cute little birdie to nest in ...

Seldom around Canterbury have we witnessed flocks of Yellow Eyed penguins in our skies .. it's high time we put this right with a shag load of government funding ....

... let's do this !

So very true. I could not agree more.

My concern is for their mental health as I’m seeing increasing use of the suicide threat.
They are only facing losing their farms which is the same as losing a job in any industry during a recession, or business owners when they crash their business.
So I think their fears should be addressed with modern techniques such a Valium and counselling help lines.

Sorry, you miss the context of also losing their home. Not such a big risk in other sectors.

Valium? I hope this is some dark joke

In summary, the farmers at risk have the same experience as any business, and yes, business owners do loose their homes to a bank.
So Farmers, join the rest of us.
The hourly rate workers will loose their home if they can’t pay their mortgage, not much fun for them either.

The farmers lose all their animals too. Just saying

Facts. Pffft who needs them. A good whinge on assumptions is way more productive.
Good article, not really to much to get excited about though personally I side with fifty shades on that issue, so much wrong with planting masses of pines.

For all of the above reasons, 3.09% is the correct value of dairy’s contribution to the New Zealand economy.

As a non-economist can I conclude that bank lending to the agricultural sector is underwriting land banking rather than productive enterprise that qualifies for inclusion in the GDP calculation algorithm?

Westpac NZ CEO:

Some heavily indebted dairy farmers are barely covering their interest payments despite relatively strong prices for several seasons, Westpac NZ chief executive David McLean says.

"The ones who've got more leverage, most of those are still covering their cost of production but some of them are close to the edge," he says.

"Their interest cover isn't that great – there are a lot of farmers who are doing it tough and there's not a lot of buffer." Link

This is true, in fact if we got rid of dairy farming it would probably be even less than 3.09% $14billion in exports is nothing and we should all be enjoying soy milk anyway.

because soy milk is so good for the environment - yawn

Your framing is poor.
Dairy farmers have been the least resistant to change.

It's not a we... and them.
We are them in your speak.
It's government regulators need show respect, toward all in the community, no one wants your sympathy, and what makes you think you are in a position to even offer such!

You comment re a billion trees, it was policy of a minor party, one that no one, even said party thought would ever come to pass. It is rubbish policy formulation. Crazy!

You have completely missed the point of the thrust given and profits taken by those supplying farm services. Farm operators are the fall guys!

All the gee whizz kit that has been taken up, most of it is paid for by the bank. Bank cash and bank revaluation of the farm.
Please do not cry for the debt ridden Ozzie banks.
Do you understand how seductive the offer of cash and buying power is?

Please remember the government absolute involvement and direction in establishment of Fonterra, and govt, hand in bringing in china ownership. China ownership that has been reciprocated by way of failure, death and fraud as Fonterra invests cash in china.
Thank you foreign affairs.

The Fonterra shareholders should sue their Board, as is happening at Boeing I believe.
The buck stops there.

Thank you.
Like I suggest, the farmers are the fall guys.

All the gee whizz kit that has been taken up, most of it is paid for by the bank. Bank cash and bank revaluation of the farm.
Please do not cry for the debt ridden Ozzie banks.
Do you understand how seductive the offer of cash and buying power is?

Thus it can be plainly seen today that the most important macroeconomic variable cannot be the price of money. Instead, it is its quantity. Is the quantity of money rationed by the demand or supply side? Asked differently, what is larger – the demand for money or its supply? Since money – and this includes bank money – is so useful, there is always some demand for it by someone. As a result, the short side is always the supply of money and credit. Banks ration credit even at the best of times in order to ensure that borrowers with sensible investment projects stay among the loan applicants – if rates are raised to equilibrate demand and supply, the resulting interest rate would be so high that only speculative projects would remain and banks’ loan portfolios would be too risky.

The banks thus occupy a pivotal role in the economy as they undertake the task of creating and allocating the new purchasing power that is added to the money supply and they decide what projects will get this newly created funding, and what projects will have to be abandoned due to a ‘lack of money’. Link

This doesn't concern me as I live in the big city, but I don't think the government is doing enough. We need to get these farmers out of the rural land and into the cities to work in the factories. Then finally NZ will be a pristine country 100% pure.

Distinctly average trolling, Skudiv.

I'm glad you have a sense of humour.

i read your name as skulldive. Perhaps its what the nurses did to you in the maternity ward all those years ago

In fact one of the reported key concepts of the UN agenda 21 is to concentrate people in cities to save the environment.

And make it easier to control/terminate.

The biggest milk company in the US declares bankruptcyhttps://www.stuff.co.nz/business/farming/117380386/the-biggest-milk-comp...

Are farmers here keeping a eye on the overall market conditons overseas - or just pump those cows and she be right and blame fonterra (which we own)?

Thats good for NZ farmers. Less competition means better prices

You think?
Since 1975, the amount of liquid milk consumed per capita in the US has tumbled more than 40 per cent. Americans drank around 24 gallons (90 litres) a year in 1996, according to government data. That dropped to 17 gallons in 2018.

17 gallons x 350 million people = a shitload of milk still to be consumed. Biggest dairy producer in US goes bust. We have currency and cost per KgMS advantages when compared to other producers. The US will have to look to international markets to fill void.
So yes, yes I do think

Good for you - so the overall trend is less milk, more cheese?

Fun fact - cheese is made from milk. Therefore, milk will still be in high demand

The company that's gone broke may have been particularly exposed to the fluid milk market, since they cite alternative milks as a reason for their problems. However:

Americans may be drinking less milk, but consumption of US-produced cheese products continues to grow, according to Rabobank. As a result, the 98 lb decrease in fluid milk consumption has been more than offset by the 226 lb increase in milk used to manufacture cheese.

HTTPS://WWW.FOODNAVIGATOR-USA.COM/ARTICLE/2019/01/30/US-CONSUMERS-CONTINUE-TO-EAT-MORE-NATURAL-AND-PROCESSED-CHEESES

And in same time us population has increased by about 50%, so more milk consumption overall? Also that era was when the dopey anti-fat consumption crusades were going on, now revealed to be generally worse than higher animal fat diets. Add to which we have aging populations with all sorts of problems with low bone density due to low impact sedentary lifestyles - needing higher calcium intake from dairy to help. Reasonable chance that milk consumption will climb - particularly as alternatives come with their own problems

Sorry humans can do without dairy (its baby cow milk). Studies showed calcium link via milk also no effect in reducing osteoporosis. Nice try though
Studies have shown that greater milk consumption during childhood and adolescence contributes to peak bone mass, and is therefore expected to help avoid osteoporosis and bone fractures in later life. But that’s not what researchers have found (as you can see in my video Is Milk Good for Our Bones?). Milk consumption during teenage years was not associated with a lower risk of hip fracture, and if anything, milk consumption was associated with a borderline increase in fracture risk in men.

You've sidetracked from your original post - "Are farmers here keeping a eye on the overall market conditons overseas - or just pump those cows and she be right and blame fonterra (which we own)?"
In fact, market conditions are looking very favourable. This is exactly what Fonterra needs right now.

Yes I have...still trying to work out the difference between milk and cheese as you commented on...

And China has culled 160 Million Pigs - 25% of global herd so demand for alternative protein - Chicken/Beef/Lamb will probably increase NZ exports of same, is that a bad thing?

You appear to have omitted how the government has been handling M.Bovis to date.
As an offset, the farm debt mediation bill is in progress.

Irrespective of the commentary, fundamentally farmers are buying into and running a business. from this perspective, all their decision making must be from this perspective. When they borrow money from the bank they must consider their ability to repay it which means they must consider their income stream (including the fact that it may be less) and their cost structures.

Banks must also be accountable for their practices here. Most bank farm account managers present themselves as business advisers and then, frankly, lend money into a business that is already under some level of stress. Banks lock up security over the land and assets at everyone else's expense with almost no accountability for shoddy business practices. Compare bank lending practices into farms with that of an urban business. I suggest they are worlds apart.

As far as the ecology is concerned, again from a business perspective, any urban business which poisons a local stream or waterway is held accountable to a high standard. Why should farms be held to a different standard? If a farmer makes a sound business orientated decision to convert his farm to forestry, who cares? So long as he doesn't cry poor me. As far as emissions are concerned farmers should be treated like everyone else. If we have to pay for our emissions, so should they. And this last point links to the first paragraph.

any urban business which poisons a local stream or waterway is held accountable to a high standard

Except, of course if'n yer a TLA, where hosing the raw sewage down the nearest stormwater outlet whenever it rains and the system overflows, is not only BAU, but buttressed with 10-30 year consents to carry on doing exactly that.....

Yes ,the Napier estuary gets raw sewage dumped into it after relatively minor rain events. It's happened since a new subdivision, the problem is we are all going to pay to fix up something that should have been done properly in the first place, and as you say was consented.

Presuming the government continue with their water policies the average urbanite is going to be absolutely floored by the cost they are going to pay. Way worse than farming and they seem to have no idea it's coming as they point the finger at farmers.

Its alright , Tesla are going to reinvent the toilet. Pre order your Tesla toilet now.

Taking business advice from a bank is the first mistake too many make. Like taking advice from a car salesman with familiar catch phrases like "ofcourse you need a new car" and "boy do I have a deal for you"

Too much land is being converted to forestry: the Productivity Commission in its report " A low emissions economy" recommended " substantial levels of afforestation to offset NZ's remaining emissions. This will require sustained rates of planting over the next 30 years ( mostly on land currently used for sheep and beef farming ) potentially at a rate approaching the highest ever recorded ( 100,000 ha in 1994 )
So 3m ha over thirty years. Statistics NZ says area utilised for sheep and beef is 8.5m ha in 2016, so 35% less.
Cows will need to be culled for NZ to meet its emissions targets :" A greater than 10% reduction ..... will likely require on farm mitigation and land use change"-- says it all.
Farmers are going to be paying amounts through the roof for emissions : so will every other emitter, and ultimately the public --the same productivity commission report recommends " NZ's emissions price will need to rise to at least $75 a tonne of CO2 equivalent ( from its present $25 ) and possibly over $200 a tonne over the next three decades.
Sheep and beef farmers are struggling to compete with carbon foresters with the CO2e price at $25, how will they compete at $75?
Water reforms are going to cost tens of billions of dollars : the new (2019 ) NPS FM proposes that nitrate leaching over the Canterbury Plains be reduced by 76%. In 2017 Environment Canterbury commissioned a report on the social and economic consequences of meeting a similar objective as called for under the 2014 NPS. This report compiled by S. Harris and T. Davie concluded that there would be "severe social and economic consequences as a result of trying to meet the.. standards" and that economic activity in the area surveyed ( Selwyn Te Waihora ) would fall from $375m per annum to $75m. The whole district, not just farmers.
The above represents the context that farmers and their bankers are grappling with. By the time this government reaches the end of its first and only term it will have set NZ firmly on the path to bankruptcy for sweet f/a gain for the planet (0.17% of world emissions ) and even less for our local environment.

World's biggest car company VW/Audi (VAG) says that EV's will be cheaper to make than IC cars within about 5 years - so the world will desert petrol and diesel over next 20 years. We have to add 20-40% capacity to grid to make that possible. Nothing else will have anywhere near as much impact - and it will be cheaper than status quo. But we need to start building a couple of big nuclear power stations or vast pv and huge pumped storage right now (given 10 year lead times) to make that transition feasible and keep the lights on once domestic gas runs out. And just forget this economically destructive and ineffectual urban hate-driven targeting of our vital agricultural sector.

I would be interested to know your sources but the change will happen over a decade after perhaps 2030, guessing.
In the meanwhile we could terminate the contract with AZAS and start with a spare few billion kilowatt hours.
Every bit helps.

Lose the farm get another job ,dairy farmers were so smug converting dry stock farms in marginal areas and guess it didn’t work ,lol but I guess landcorp forestry conversions in Taupo took the cake

Growing pains, make sure the medium-lower incomes productive tax payers at least still got:
1) a Job
2) a shelter or some sort
3) able to afford a meals
Apart from those basics, resistance to change can be controlled, Govt of the days still got voters support, tough battle ahead for dairy farmers - as the policy makers can be distanced from this NZ industrial tradition by way of their background voters based. eg. the recent migrants, less concern about dairy, voted for migrants leaning needs politicians.. more and more of them, what would it be? in the end for farmers.

Methinks that farmers will have the last laugh. As global food prices continue to climb, the economics of farming will be transformed. Converting good farming land to unproductive carbon credit yielding overseas owned forestry should help boost food prices further.

Biting the hand that feeds you seems to be in fashion, but is it really such a clever thing to do?