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Keith Woodford says land-use change is no solution for most farms caught in the debt to asset pincer

Keith Woodford says land-use change is no solution for most farms caught in the debt to asset pincer

In recent weeks I have been writing about dairy-farm debt and declining asset values. In this article I pose the question as to whether or not we can expect to see a significant number of dairy farms convert to other land-uses as the pincer between land values and debt takes its toll.

The simple answer is that it is only going to be farms on either marginal dairy land or on potential horticultural land where, at least in the short-run, there will be significant land-use change. Apart from horticultural options in very specific areas, the economics do not favour a big change of land-use.  On most classes of dairy farm, values would need to drop a lot further before sheep and beef cattle raising would come into play.

This is because dairying is inherently more profitable than sheep and beef, and this is the way it has been for the last fifty years on most of the better-quality land. However, there are exceptions, particularly at latitudinal extremities in both north and south. More of that later.

As for cropping options that are not horticultural, these are largely restricted to the better soils in the east coast regions from Hawkes Bay down to North Otago. Many of these better soils are already predominantly in cropping, and existing cropping farmers are already scratching their heads in search of new and more profitable crops on these lands. Cash cropping is always challenging in the New Zealand climatic and economic environment.

The latest DairyNZ statistics show that in 2018/19 dairy farm numbers decreased by around two percent. However, existing dairy farms increased their cow numbers by about one percent and production per cow also increased by about one percent. This left total production unchanged. 

Many of the farmers that have left the dairy industry appear to be older small-scale farmers who have stayed farming but stepped back to dry-stock operations. These tend to be farmers who, because they have not expanded in the past, have low debt. In some cases, they either already have or soon will have a pension to supplement their farm income. The bottom line is that it was not debt that caused them to change land-use. Rather, it was a wish to simplify late-career lifestyles on these smaller properties and reduce compliance hassles.

The evidence that I can see suggests that where dairy farmers have actually sold land, then in most cases, as has been the situation for many years, that land went to an existing dairy farmer.  This is why the size of farms keeps creeping up.  The only difference now is that with so few buyers in the market, the average herd size is only increasing at around one percent instead of four percent each year.  

The specifics of the situation are playing out and will continue to play out differently across the country. In Northland, the soils that are suitable for subtropical fruit growing are well recognised and most of these are already in some form of horticulture or clearly identified to go that way in the future.   If an existing farmer has to sell such land because of debt pressure, then it may speed up the process, but nothing more.

Dairying has always been challenging in Northland. The cows tend to stress with summer heat and humidity, maintaining feed quality is challenging, per cow production is almost always lower than elsewhere in the country, and per hectare production is also lower than elsewhere apart from the West Coast of the South Island.  For those who wish to sell, the challenge will be to find a buyer. This is the region of the country where dairy economics and beef economics are closest.

In much of the Waikato, it makes no sense for either existing farmers or new farmers to change the land-use from dairy. Kiwifruit, fresh vegetables, milking goats and milking sheep are all candidates for expansion, but the impact will be modest in the overall scheme of things.

There are many well-established Waikato dairy farmers who would still like to grow their Waikato dairy businesses, but to do so they have to extract their investor equity from South Island corporate-type farms.  Currently, that is not an option.

Taranaki is different again. Alternative land-uses are few and far between for this high rainfall country. Some Taranaki farmers would undoubtedly still be interested in expanding their businesses but most have no hope of doing so with current lending criteria.  According to DairyNZ data from 55 Taranaki survey farms, the Taranaki debts average $35 per kg Milksolids (fat plus protein) and these are the highest average-debt levels per kg Milksolids in the country. For these high-debt Taranaki farmers, changing land-use is definitely no solution. Taranaki farmers are less likely than Waikato farmers to have South Island dairy investments.

The South Island has three distinct dairy regions. These are West Coast plus Nelson/Marlborough, Canterbury/North Otago, and Southland/South Otago.

West Coast plus Nelson/Marlborough farms had the highest average debt in 2018 at 65 percent of assets. Many West Coast farmers would have been in an impossible situation if it were not for Yili coming in and buying the co-operative shares at a big premium, and also guaranteeing Fonterra’s milk price as the minimum price. Nevertheless, there are many West Coast farms still in trouble. Some farms are more than a little rundown and I can see some of these going back to beef with new owners. This will require existing farmers to sell up and the bank to take a shave on their loan book.

Canterbury farmers are in a stronger position than Westland in regard to debt, but many are seeing big clouds looming with environmental restrictions. I am optimistic that there are technologies to solve those problems but they require more investment. Right now, there is no mood for that. 

Alternative land-use options for Canterbury are less than is widely perceived, at least by urban folk. Much of the Canterbury dairy industry is on soils such as Lismores and Eyres that have no potential for cropping. As for crops such as wheat, these are possible on the better soils within a rotation, but the economics are not attractive. A shift from dairy to other land-uses will require higher value specialist crops which existing crop farmers are struggling to find.

South Otago and Southland are different again. Here the debt levels are particularly high, probably now averaging around 70 percent of value, but with no current floor to those values on the marginal land.  Given the challenges of outside-cow wintering in this region, it is easy to see farms on the hills and also some of the flats going back to sheep under new owners. Once again, the banks will have to take a shave to get some of these sales across the line.

The big picture message across New Zealand can be summarised as being that dairying remains the most economic land-use on most existing dairy land. The caveat is that environmental restrictions could change all of that. If that does happen, then many farmers will be left with nothing after the bank has been repaid. Finding alternative land uses is challenging.

*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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Thanks Keith. I dont see a mention of the Manawatu/Tararua dairying area in this analysis. A few dairy farms have converted to finishing units here. We also have hill county farms going into carbon farming. Maybe we will see hill country farmers buying easier country to fatten their own stock. Your thoughts?

Yes, I omitted to mention the lower North Island. This was linked in part to to space constraints but also because of a belief that I was not close enough to the diverse stuation there, including Hawkes Bay, Wairarapa and Manawatu, to get into the detail with informed comment. However, I think there are some complex issues relating to farming consents for dairy on some of the Manawatu farms. I also believe there are some recent conversions (last eight years or thereabouts) in the Wairarapa that are struggling. The probem with new conversions is that moving away from dairy leaves stranded assets. I would expect most such land-use changes would result in the current owners having negative equity and banks also having potential for a shave.

I stopped eating meat about 12 years ago after watching Earthlings.

I stopped eating dairy shortly thereafter seeing the treatment of bobby calves.

I am now bathing in sanctimony and think we need to be creative in finding a new use for them thar hills.

I propose a debt jubilee and the creation of more national parks.

Maybe a kiwi/weka farm?


I like farming. And currently people like eating my beef and lamb. They seem to like it a lot. They pay me a whole heap more than they do for pork and chicken. Or apples or pears.
So you go do your thing Timmyboy. Take your sanctimonious claptrap back to your National Park. Stick your debt jubilee up your jacksy. I have had enough of this tripe. What do you do for a living? Is it ethical? Show me your life and prove your existence is worthwhile. Leather seats in your hyundai? Overseas travel twice a year. Wear the latest in plastic fantastic which washes into plastic balls out to sea for fish to digest? Keep a dog or cat as a pet? What do they eat? Hypocrites in full view.

Thats the problem these days. Being a virtue signaler is now a profession

Wow. I'm sorry my personal choices upset you so.

Sanctimony - the action or practice of acting as if one were morally superior to other people aka a virtue signaler

Earthling is pro-vegan, animal rights propaganda that is in no way an accurate reflection of NZ farming practice.

The horrific footage of some sub-human beating the crap out of bobby calves was in an unregulated back yard pet food factory. Regulations are a lot tighter now.

It is also true that for many people their lives are so urbanised and sanitized that they find the idea of the food chain and the natural world too shocking to contemplate.

Man, admitting to being a vegan in this country is akin to taking a dump on the national flag.

I'm a supporter of NZ farmers. Just not the ones that raise animals to be killed.

"I am now bathing in sanctimony". The narcissistic vibe is generally shunned by kiwis. Like, we get it, you think you're better than us

Said with tongue firmly in cheek.

I'm sorry you didn't pick that up.

Nice flip flop

Have you ever heard anyone saying "I'm bathing in sanctimony" without irony?... Jeesh

You only claimed irony after you received a frosty reception, a good example of a flip flop

It's curious that that a segment of society doesn't want animals to be killed for food but is quite happy that a far greater number of animals be killed to produce their non animal foods.

That wasnt a comment on personal choice. You want my farm turned into a national park. That was your statement.

I dont tell others how to earn their keep. I dont tell them their way of life is wrong. When I hear of cats and dogs being mistreated I dont get on social media and demand that all pets should not exist. I dont ask for Auckland to be razed so that I can enjoy the beaches in solitude. I dont ask that other citizens stop driving and flying because I am concerned about climate change. Yet everyday I am confronted with urban people suggesting farming cattle and sheep is wrong. That my way of earning a living is wrong. Farming people are really tiring of this. We feed people what they want to eat or we go broke. I am not going broke. Neither are most dairy farmers. We all have some tough times every now and then. But as Keith says most dairy land will stay dairy land. Mostly because its profitable most of the time.

hardly sanctimonious clap trap - I would give you that award to you for your comment Belle. The reality is that unless the virus does it's job, the world needs to stop eating meat - even if people do like it.

I think the world is just overstocked. Continual population growth isn't sustainable

really? world need to stop eating meat? not reducing but a full halt? also, maybe beef is too much, but many parts of the world do not eat beef that much anyway. I do not see how humans will stop eating animal products all together any time soon, regardless of the number of people on Earth.

Do some reading. Better use of your time than nit picking away at the general concept of what needs to change.

He called himself sanctimonious. Did you not read it?

I too know a group of friends who stopped eating meat after watching a documentary.

They lasted about a year before realising their health was on a downward spiral. Low energy and a constantly sore stomach seems to be the common thread.

Meat's back on the menu big time for them.

Are grapes and olives an option for Canterbury? Certainly worked around Martinborough.

Good Samaritan,
Canterbury vineyards south of Amberley have struggled from a lack of sufficient summer heat units. Maybe that will change in future, but that is the way it is right now.
A number of people in Canterbury do grow olives but I don't know any who have made good money from it. I suspect that once again it is insufficient summer heat units.

If land prices have collapsed in Canterbury, those growth orientated Waikato farmers have lost all equity they may have had. Anyway the way Fonterra has performed and the relationship the aforementioned farmers had with governance suggests without capital gain, they don’t possess the ability to make sound growth investments.

I am advised by professionals in the field that not one Canterbury dairy farm has sold this season despite approximately 50 declared as being on the market and many more undeclared where farmers would love to sell. In contrast, a few farms are currenty selling in the Waikato. So, in Canterbury it is impossible to know where the floor currently lies. Some farms have managed to restructure with new equity capital brought in but this is largely limited to a 24.9% capita injection to stay under the OIO limits. Also, non bank lenders are starting to appear, associated with restructuring of bank loans with te bank taking a shave on their loan book for these specific properties.

Along the way to becoming a highly specialised industry, dairying has taken on the characteristics of a jealous mistress. There is simply too much invested in on farm infrastructure and shareholding to walk away from, even if some other land use could service the associated debt. I recall a period in the 1970's when there was considerable to-ing and fro-ing, especially in the Waikato and Hauraki, between milking cows and growing maize. Sell the cows, a few years in maize whilst on overseas holiday, regrass the farm and put on a 50/50 sharemilker, what could be more perfect? I doubt that that would be possible now.

The answer for farms with weak balance sheets is usually gains in productivity, like much of the rest of Nz business - measured as TPF (Total Productivity Factor) or tying up too much capital for too little earning. More production from less cows, less staff to production, harvest more pasture and crops, capture and reapply more fertility. Fortunately, there is plenty of scope for it and it’s better for the environment, but unfortunately, they have to ignore a lot of industry thinking and urban noise.

I think that push for productivity got them in trouble in the first place. My business is all about managing costs.

Exactly. Farmers are price takers - they cant control price but can have some control over their costs. A farmer from our area had farm operating expenses of $2.70/kgMS after the price dropped to $5/kgMS. Most others at the discussion group had $5-5.50/kgMS.
I remember him saying to me that he focused on cost per kgMS, not how much he could produce per ha.
Never bought in feed, his cows had never tasted palm kernel, wintered all animals on farm and he ran a lower stocking rate than most.

Some of the larger corporate dairy farmers also run their biz exactly this way. Costs of the order of low $3's/KgMS.

James Shaw advocates cutting the NZ dairy herd by 50%; an $8bn hit to NZs economy. A real possibility exists that he could be in a position to achieve that after 19/9/20.

How much of that $8b simply heads off shore to pay interest on overinflated farms?

Damn, that’s a good point red cows.

The problem is that if there are only half the cows, then the interest - actaully about $2 billion, calculated as around 41 billion debt chrged at just under 5%, has to be paid by the remaining cows. So we move from debt of a little over $1 per kg MS (on average) to something over $2.

Is that logic correct?

This is all pretty hypothetical of course, but if half the farms are sold (because the use is changed), then the amount of debt owed by dairy farms halves too. But also, the farms to be changed in use might be the most indebted ones right? So debt would more than half if those ones had a change of use.

Economics has allways dictated landuse. Why would you sell a reliably irrigated Canterbury dairy farm at the moment ? This dry spell is a wake up call for the idiots who don't believe in water storage .

Because you may fear that mounting opposition to intensive farming could affect irrigation supply in future.

Prime schedule gone from $6.25 plus kg pre xmas to latest offering apparently $4.75 and still heading south. Boner below $4.00 and on way to low to mid $3.00 These are scary numbers for anyone needing to unload because of the dry.
If the banks put the boot in now it is really going to hurt some individual farmers.
Not looking forward to my next appointment.