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Declining dairy asset values plus high debt place many dairy farms in a pincer, with increasing numbers going equity negative despite being cash flow positive

Declining dairy asset values plus high debt place many dairy farms in a pincer, with increasing numbers going equity negative despite being cash flow positive

Some weeks back I wrote how the market value of dairy land is declining substantially. The biggest factor is a change in bank-lending policies such that local buyers cannot get funding. The second key factor is that foreign buyers can no longer buy land for dairy farming.  A third factor is pessimism about the long-term future relating to environmental issues and labour availability.

The consequence of these factors is that although many dairy farmers would like to sell, there are very few buyers. This is despite three years of good dairy prices and now a fourth good year heading into the home straight with nearly all farmers making operating profits.

In this article, I build on that situation to explore the proportion of farmers who, with declining asset values, have either exhausted or are close to exhausting their previous equity.

The latest Reserve Bank statistics (S31 series) show dairy-farm bank debt has declined from $41.5 billion in November 2018 to 40.8 billion in November 2019. This is also slightly lower than the $41.0 billion of dairy-farm bank debt as at November 2017. So yes, dairy farm debt has apparently now turned the corner. This is consistent with everything I hear that dairy farmers are focusing on debt reduction rather than any further property improvement. 

Based on last year’s milk production of around 1.88 billion kg milksolids, then the bank debt approximates $21.50 per kg milksolids.

In contrast, sheep and beef-farm bank debt increased from $13.8 billion in November 2017 to $15.1 billion in November 2019. Horticulture bank debt increased over this period from $3.6 billion to $4.9 billion. Bank debt for other on-farm types of agriculture increased from $2.1 billion to $2.4 billion. So, the big message from those figures is that agricultural lending is still on the increase but that increase is all about land uses other than dairy.

Whether or not forestry lending has increased markedly I cannot say as there seem to be no statistics on this. However, the likelihood is that forestry investment is being driven by overseas equity investors rather than bank lending. Forestry is a long-term investment not conducive to heavy debt.

One further snippet of Reserve Bank information on dairy debt comes from the Financial Stability Report of May 2019 which states that around 35% of dairy farm debt is on farms where the debt exceeds $35 per kg milksolids. The Reserve Bank perspective at that time was that debt of $35 per kg milksolids was their indicator of high risk.

The reason the Reserve Bank expresses information this way is that their concern relates to the overall financial system, rather than the fate of individual farms or even industries.  With total dairy-debt capital a little over 40 billion, it is easily calculated that the high-risk sum at that time was considered to be a little over $14 billion. 

Much of the drop in land values has been occurring since then. In the South Island there is almost no land now selling at above $30 per kg milksolids, let alone $35.  However, some dairy land in both Taranaki and Waikato is still selling above this $35 figure, but only for good quality land, and with sales few and far between.

It is important to note the Reserve Bank statement that ‘35% of debt is on farms that carry debts over $35 per kg milksolids’ is not the same thing as having 35% of farms with debts at this level.   To illustrate that point, let’s assume that we have five farmers, all with herds of the same size, where four have a debt of $17 per kg milksolids and one has a debt of $37 per kg milksolids. In that situation, we have only 20% of the farmers (one out of five) with debt of over $35 per kg milksolids, but 35% of the debt is on farms with debt over $35 per kg miksolids. This illustrates how maths and its communication can be tricky. Other more sophisticated calculations I have done suggest that an estimate of 20% of farms having these particularly high debts is probably not far off the mark. 

It is also relevant that most farmers have other dairy assets apart from land. Most have Fonterra shares currently worth about $4 per kg milksolids and, apart from those contracting with herd-owning sharemilkers, they also have livestock (cows plus young stock) typically worth around $5 for each kilogram of milksolids. 

The big picture message from all of the above is that however one looks at the data there will now be a considerable proportion of dairy farmers who now have minimal equity in their farming business.   

The other key source of dairy-debt information and the way that it is spread among farmers comes from the DairyNZ annual survey.  The limitations here are that the latest information is for 31 May 2018, and it is based on a sample of 265 supposedly representative farms. No-one can say whether these farms are truly representative but it is the best information available.

The DairyNZ survey found that at the end of the 2018 dairy-farm financial year (typically 31 May) the average debt was $25.31 per kg milksolids.    This figure of $25.31 is higher than the Reserve Bank figure of around $21.50, with this being at least partly explainable in that DairyNZ also includes non-bank debt wherever there is an expectation that this debt has to be repaid.

Much more important than average figures is the extent of the tail. The DairyNZ analysis showed that at 31 May 2018 there were only 0.4% of survey farmers for whom debts exceeded dairy assets, another 13% for whom debt exceeded 80% of assets, and another 28% of farmers with debts between 60% and 80% of dairy assets.  

Unfortunately, the real world has moved on. In my earlier article I stated that market prices for dairy land had dropped by around 20% in the last year and that the signs are they are still dropping with no floor evident. Correspondence since then with various professionals across both North and South Islands has confirmed that situation.  Indeed, with no floor evident, I may have been conservative.  Also, since May 2018 the value of Fonterra shares, which were already dropping, have declined by a further $1.10 to around $4.

If we apply a 20% decline to the DairyNZ asset values, then some 13% of farmers now have negative equity. Another 28% of dairy farms have equity less than 25% of assets, with some of these close to zero.

Should asset values decline a further 10% from 2018 values, then around 24% of dairy farmers would have negative equity.

 None of these figures will be precise and the numbers are a moving target. But there can be little doubt that there are now many dairy farmers whose financial position is highly insecure.

The one piece of good news in all of this is that nearly all dairy farms will be cash flow positive this year and so further debt repayments should be possible after paying tax. Also, a proportion of farmers are able to sell non-dairy assets, which the banks are giving strong encouragement to occur. But it does mean that if the banks do not hold their nerve, and instead get silly about forcing sales based on inadequate equity, then values will drop a lot further. From there, the snowball of growing destruction can only build.

*Keith Woodford was Professor of Farm Management and Agribusiness at Lincoln University for 15 years through to 2015. He is now Principal Consultant at AgriFood Systems Ltd. Previous article on Fonterra’s challenges can be found at You can contact him directly here.

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And how about that there little soil moisture map we keep seeing glowing in a brighter shade each day. Was thunderstorms around last evening but only some got anything. Production costs will only head up from here with the rain forecast not improving.

We have a number of problems ahead. Its dry as buggery is the number one. Then there is Wuhan Corona. I am envisaging meat and dairy orders being cancelled as I type.
My interest rate keeps going back up. Admittedly it is still quite low, but has risen from 3.85 to 4.25 in a couple of months.
The vegans have become militant.

I could only dream about interest rates like yours.
I understand at least one processor has cancelled overtime.
There goes the beef schedule.

i'm getting very dry very fast, days in the high 30's speed things up. I would imagine if China locks up, stops buying even for a week, it's going to be chaos. Think of all the seasonal stuff like apples.
So if it helps you are not alone although I have next to no stock on. I think that it's profits that matter, if you have mountains of debt but a profitable business things should work out fine. Just worried banks are going to treat bigs guys different to small guys.

Looks like the weekend will dry off what is still green. Oh and its blowing again.

Yeah I hadnt given fruit a thought. At least I could winter what I have left. They will just grow bigger. The coolstores will be full to brim with fruit with nowhere to go.

A good season will not be sufficient to help a number of farmers. I am observing a noticeable change in bank attitude to farming.
Declining rural sales teams and limiting their decision making, demanding further security and loading higher costs and margins, declining appointments to even discuss new finance proposals are examples.

going back to what it was like in the 90's?


do you think farm values will go back to the 90's too?

Sales volumes more like. Feel like a credit squeeze.
But $ still about, call it a bank squeeze.
Forced seller could be low -half from peak, for unloved land, bad spot.
And very low price places, snapped up.
A big thud back across the board slim chance.
- Assuming prices there or there abouts.

Prices are being held by banks, so they minimise $lost
Its case by case (same bank funding purchaser & and telling pressured vendor this is the price).
A guy can be moved on, equity all smoked and left with 150k to go again.
A guy in the hole for $4m, but sort of servicing not yet pushed.

Banks are in so deep on dairy farming debt they can't afford to sell the debt up; unless the are prepared to take losses, and like the farmer will have to ride the storm.

Those with little or no equity will however being paying a risk premium on their debt, as banks attempt to recover their situation.

When bank credit for asset transactions rises, asset prices are driven up, because the loans do not transfer existing purchasing power, but instead constitute an increase in net purchasing power: money is being created and injected into asset markets. When a larger effective demand for assets is exerted, while in the short-term the amount of available assets is largely fixed, the price of assets must rise.

Such asset inflation can go on for several years without major observable problems. However, as soon as the credit creation for non-GDP transactions stops or even slows, it is ‘game over’ for the asset bubble: asset prices will not rise any further. The first speculators, requiring rising asset prices, go bankrupt, and banks are left with non-performing loans. As a result they will tend to reduce lending against such asset collateral further, resulting in further drops in asset prices, which in turn create more bankruptcies. When asset-based lending had become a major part of bank portfolios and when banks had already driven up asset prices by several hundred percent due to their excessive asset-based credit creation, then it is inevitable what will follow: bank equity is usually less than 10%, and thus asset prices need to fall only by a little more than that – which is not difficult, after rises of several hundred percent – and the banking system is bankrupt: losses from non-performing loans have to be made up from equity (if no other funds are available, which is usually the case in such situations).

Thus a full-blown banking crisis must follow after a bank-credit driven asset bubble. One does not need to be a central banker to know this very well. Link-section III

"Thus a full-blown banking crisis must follow after a bank-credit driven asset bubble. One does not need to be a central banker to know this very well"
All very well, but despite myself and many other DGMs knowing this and even acting on that knowledge, heaps of others have ignored it got and even got out and are sitting back rich as. When do I and the rest get a payoff for that knowledge?

Not being a part of the majority who don't get out.
Those who where smart or lucky enough to get in at the start and get out once capital gains slow are always going to make money.
The FED and ECB (and the rest of the world world who have to play their game) have distorted the length and size of the bubble but I still believe the majority can't get out (as this is part of the bubble collapse) even if most of the majority end up being people who have bought in at the last min.

Audax, your Link-section 111 article by Professor Werner is very revealing although I need to read it again to ensure I have it right. I think he is saying that localized smaller banks focusing on the local economy, as in Germany and Japan, is a better system than the Anglo-Saxon ( UK & USA ) central banking system.

Debt applied to assets is only beneficial when (1) the assets have available, unrealised, revenue/profitability performance, when (2) the assets are positioned in a tide of price inflation, or (3) have individual value-capture opportunity. And the 'long-term, highly responsive, knowledgeable and trusted business partners' from the banks are rarely concerned with anything other than, or have any awareness of value other than, number (2). Bankers are salespeople, and the product is debt, not value capture or value creation. It is utterly dismaying to see New Zealand farming delivered into this state.

Good summary, Keith. Sounds as though, for perhaps 1/4 of dairy, their position is almost as precarious as that of Hospo...or Tourism....

Depends how, what method banks wish to "value" the asset part of their loan.
They don't seem obliged to mark to market.

A positive is most farmers are willing to pay debts, rather than borrowers who won't pay.

Declining house values plus high debt place many homeowners in a pincer, with increasing numbers going equity negative despite being cash flow positive - I feel like we've seen this before

.. apparently 77 % of our $ 1.2 Trillion value of houses is paid up equity ... only 23 % is debt ... that leaves some wiggle room during a downturn , before the bankers start foreclosing procedures ...

For whom?
Two thirds of households are mortgage free and have no liability for the indebted third, who are responsible for liquidating the banks' mortgage assets. Moreover, banks put up just $8 dollars capital for every $100 of debt created. Depositors and other unsecured creditors are basically underwriting the whole casino with little in the way of risk adjusted remuneration compared to bank returns.

Very well said Audaxes

No surprise. Over priced on assumption of perfect trading conditions and high payouts. Will houses and commercial be next if perfect conditions change?

I understand banks are now pulling out of commercial lending. From a bankers mouth yesterday.

getting 'risk adverse' in a hurry, Looks like cash will be king again.

Belle, what type of commercial lending?
On commercial property or commercial business lending?

I think it was commercial property. Thats the impression I got as we were discussing property at the time.

Had that signal last year. Investor commercial book was closed. Owner occupier with a profitable business to be the tenant as a buyer, and all business with the bank might be ok.

This is the wrong metric, yet it is used by everyone including the Bankers, it is one of the many places we have gone wrong as an industry. This obviously skews results due to certain farmers operating a system 1-2 vs a 4-5.
If only we could learn to focus more on profitability rather than our obsession with milk solids. EBIT per HA or Debt per HA would be far preferable to me.

For 2017/18 (the last year available from DairyNZ Annual Survey), System 1&2 made an operating profit of $1576/ha cf $2516/ha for System 4 & 5.
Dairy operating profit for System 1& 2 was $1.90 perkg MS cf $2.00 for Systems 4&5.
System 1&2 achieved an operating return of 3.7% on dairy assets cf 4.5% for Systems 4&5.
This was acheived off an average payout of $6.62
Debt to asset ratio is almost identical for System1&2 cf System 4&5

How do they fare in the lower payout years though where they aren't earning $6.62? How do they handle the peaks and troughs of being a commodity based business. My understanding (correct me if i am wrong) that is where the high inputs farmers have come unstuck. Well, that and the more than generous lending conditions.

DairyNZ data shows that for 2015/16 there was no relationship between operating profit and kgMS/ha (average payout $3.92)
All other years back to at least 2005/6 show a positve relationship between operating profit and kg MS/ha.
Direct comparison of System 1&2 cf 4&5 in 2015/16 showed 1&2 did better on a per kg MS basis that year (2015/16).
In all other years back to 2009/10 System 4&5 outperformed System 1&2 on operating profit per hectase.
Data before that is not directly comparable, but 2008/9 was the other year when it looks like Systems 1&2 did better than 4&5.
So the simple answer (and simple answers are never the full story) is that System 4&5 have produced higher profits in >80 % of years. It all depends on the milk price and the cost of supplements. Of course there are good and bad operators across all systems.

Interesting. DairyNZ advocate supplement use is only profitable at the right price (.05% $/ms)/kgdm?) and only if cows grazing to residuals of 1500kgdm/ha. From my knowledge of supplement prices and residuals I see over the fence when out and about, it’s a tough ask. We’re very much confined by the green revolution mentality of production at all cost.

In a drought a few years ago I commented to a dairying mate I was down about 30k in income ( I am drystock) His reply was his milk solids had gone up.
Didnt say what the cost of that was.

Your point is? You are referring to income (ie sales) and so is he. Or did you intend to use the word profit instead of income in your post.

Yip indeed finite. It is always very difficult to get a dairy farmer to talk profit and loss. They focus on production. Well thats how it was. Been a while now since I shimmied along a cowshed railing trying to get a hand up some poor girls bottom.

So much pessimism.What percentage of dairy farmers have no debt or high equity and will just ride this stalemate out, Making good profits,paying tax and quietly growing their businesses . It would have to be more than 50 %. How about talking about the majority for a change.

Using DairyNZ data for 31 May 2018, 40% of farmers had debts comprising less than 50% of assets at that time.
With declining asset values, I estimate there are now about 28% of farmers in this category.
With current lending criteria I estimate there are only about 6% of dairy farmers who could use leverage to increase their dairy buiness by say 30%. Ironically, most of these 6% are not interested in increasing the size of their business - if that was their focus they would have done it some years back when bank-lending policies made it easy.
The reason I focus on those with high debts has nothing to do with either pessimism or optimism. The reason is that they are the ones whose situation is currently problematic with no easy solution.

I have never submitted my accounts to Dairy NZ for analysis ,so don't know how they conjur up that figure. From my experience and observations the dairy barners in Canterbury ,who you push as an employee of large shed builders have found their business plan doesn't work in a volatile income scenario. Why do you need to grow 30 % in one hit ? Lots of small steps get you to your destination at lower risk in the long game. It would be good if you stopped estimating and talked facts. What percentage of dairy farmers in New Zealand have no debt for starters ?


Banks are squeezing even farmers with reasonable equity so they can’t fund cashflow, make poor management decisions to save cash impacting profit, and through high interest rates. There are not many who are trading profitably on low equity for that reason.