Agricultural debt - monthly woes

 Some more scary reading about agricultural debt, especially  about the biggest borrowers the dairy industry by Agricultural Production Economics. This analysis started as an attempt to determine the conditions under which it would be possible to reduce farm debt, and an assessment of how that might transpire over the next ten years. It was quickly apparent that the conditions required for farm debt to reduce are simply not realistic for farms with high debt. Even dairy farms with average levels of debt will need favourable conditions to service existing debt - let alone repay it. It is worth noting that Australian dairy farm debt per Kg of MS appears to be less than half that of NZ. Once again we concentrate on the dairy industry because it is simple to analyse and carries most agricultural debt i.e. 61.5% of the total. On that basis the dairy industry had farm debt of $27,499 million out of $44,714 million at the end of March 2009. NZ milk production will be approximated to 1.3 billion Kg of milk solids (MS). Average dairy farm debt is a little over $21.00 per Kg of milk solids produced for those interested. But with average debt of $47.59 per Kg of milk solids the most indebted third of NZ's dairy production is almost certainly already in a situation of negative equity. Decreases in Fonterra's equity, dairy cow prices and farm values will not help the picture but are unnecessary "“ understanding future debt servicing costs adequately conveys the gravity of the situation alone. Consistent with the demise of farming for capital gains and now important at any debt level is farm profitability. While finance costs dominate profitability where leverage is high, EBIT has the major influence within similar debt profiles. In looking at how to achieve higher EBIT it was obvious that it is the cost component that is most important, and for several reasons:1. NZ agriculture is in the commodity business and international competitiveness is all important 2. Farmers have little control over the payout they receive 3. Once we get beyond the agribusiness approach there remain major opportunities from applying long established production economics disciplines 4. Costs are stickier than payout. In last month's comment we mentioned Rabobank asking dairy clients with in excess of $50 per Kg of MS to make other arrangements. Rumour suggests those farms went up for tender but were withdrawn when no tenders met 50% of the vendors original purchase price. That process may have established something of a pattern for genuine attempted forced sales. On a more general note we continue to be concerned by what we consider to be a deterioration in the availability of industry or government provided information on farm profitability, particularly in comaparison to that available for Australia. The suspicion is developing that a consequence of that is NZ agriculture, and NZ agricultural economics in particular, is well off the pace.