Reserve Bank sees further farm price falls; warns of dairy farmers facing negative equity

Reserve Bank sees further farm price falls; warns of dairy farmers facing negative equity
Farm prices relative to export earnings at elevated near record highs.

By Gareth Vaughan

The Reserve Bank says farm prices may need to continue falling to see “substantial” buying interest reemerge and is warning further falls could see dairy farmers who took on debt to expand during the boom times ending up in negative equity.

In its November 2010 Financial Stability Report out yesterday, the Reserve Bank notes that farm prices had fallen by about 15% from their mid-2008 peak by the end of 2009. It says prices appear to have fallen even further throughout this year, but given the extremely low volume of farms being sold, the current level of farm prices is “highly uncertain.”

The most recent farm sales figures from the Real Estate Institute of New Zealand (REINZ), covering the three months to September 30, show just 53 farms sold in the month of September, down from 75 in September 2009 and 130 in September 2008. Of the 53 sales during September, just one was a dairy farm, with 12 dairy farms sold in the quarter, down from 55 in the same period of 2008.

And although the REINZ said the median farm price for the three months to September was NZ$1,012,500, 15% up on NZ$877,500 in the same period last year, it remains 39% down on the median price of NZ$1,672,500 in the September quarter of 2008.

Meanwhile, the Reserve Bank says farm prices remain elevated relative to earnings meaning; “It is likely that farm prices will need to fall further to see substantial buying interest rekindled.”

An "ongoing overhang" of delinquent farm loans tends to reinforce this view, the Reserve Bank adds, but notes that banks appear to be working with their customers and looking for ways to put indebted farm enterprises on a more secure footing.

Nonetheless, further falls in farm prices would be bad news for dairy farmers who took on debt to expand near the land price peaks, pushing them into a position of negative equity where the value of the farm is less than what the farmer owes his bank.

The Reserve Bank does note, however, that most dairy farms are currently profitable. Fonterra recently announced a payout of NZ$6.10 per kilogram of milk solids for the 2009/10 year, with the payout for the 2010/11 dairy season forecast to rise to NZ$6.60.

“The current payout is comfortably above the Ministry of Agriculture and Forestry’s estimated median farm break-even payout of NZ$5.13,” the central bank says.

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Thought that was the case....banks holding back in an effort to keep the bubble up...fat chance of conning the farmers on that one....the word spreads like hot butter.

Don't panic.

It'll be Taxpayer to the Rescue, as always.

Add Te puke kiwifruit to the mix

And the truth about the storm damage down south has been swept under the woolly rug.....!

Farm prices have to have some relativity to income. If I was on $50k per year would the bank lend me $1million to buy a house? No they would show me the door. But this is exactly what has been happening to farms. The lending is unrelated to the income. For the sake of a new generation of farmers who want to buy a farm it has to be run like a business and not a pyramid scheme.

Which NZ institution has been negligent in allowing that situation to arise?

It's not a science. It's about judgement and management - it's what is proposed now. Why not back when it really mattered?

That institution is independent, is it not? So government couldn't influence it. So why didn't they act in accordance with their much vaunted and frequent prudential rhetoric as iterated through the upswing? A rhetoric they now seem (seem, note) almost keen to implement at the behest of the 'Boys from Basel'. (Yeah right.)


F*kking bollocks.

We have been so f*kking let down.

Cheers, Les.

There's only one " k " in f*cking , Les . Hey , you seem a tadge aggrieved , old chum . Rest easy under a coconut palm , and the Gummy one will fix you a restorative mango crush .

Now what troubles thee ? Alan Bollard's ineffectualness ? Well , that's not new is it . He has limited powers , and is that such a bad thing . Look at Bernanke , that dude has really gone overboard . Do we want that in NZ ?

Labour & National ? As ever , through all this boom & bust , both have been about  as useful as a bicycle is to a fish .

Farmers / Investors ? Now these guys really have gone overboard in their zeal ( and greed ) . Farm incomes are miniscule in relation to the capital cost of each unit . More so with sheep and beef ; Lord knows how they stay solvent .

Lending institutions ? In for the good times . Bail on the bad . That's never changed , has it . Their modus operandi is to " sea-gull " the industry ( swoop in , gobble everything in sight , crap on everyone as you leave ) .

Hey , have a f*cking good evening , Les . Catchya : RT

Is anyone really surprised by all this?  Policy, public institutions have been aligned to consumption and debt, the land and buildings Ponzi scheme, assisted by our inflationary and inflating OCR, absent capital gains tax all promoted exactly what we got.


Unwinding it is scaring the shit out of everyone how can see further than the next feed.    

Is anyone really surprised by all this?  Policy, public institutions have been aligned to consumption and debt, the land and buildings Ponzi scheme, assisted by our inflationary and inflating OCR, absent capital gains tax all promoted exactly what we got.


Unwinding it is scaring the shit out of everyone how can see further than the next feed.    

John/ Les I told you years ago, as long as a nation is forced to consume “Coro Street” and “House for sale” at prime TVtime in stead programs about production/ manufacturing e.g. NZapples form Nelson are grown, harvest, processed, packed and shipped, we don’t see any changes.

The changes you are looking for need a culture change among a wider population including professionals/ politicians in this country first – means solid basic PRGround- work with the media.

NO Roger ! I had to, but I go again- bye !

C'mon Walter  : You're just as addicted to venting your spleen as the rest of us ! And that adds nicely to the mix at .

Now , regarding the " currency wars " comment you made on another thread , America is doing what it feels it must , to keep it's economy ticking over . It has no obligation to anyone else . Least of all to China . So long as they maintain their peg to the $US they are in no position to bitch . Tough Mooncakes , gang !

Cheerio Kunzie .

Q- America is doing what it feels it must , to keep it's economy ticking over. It has no obligation to anyone else.- Q

This isn’t that simple, but serious. China’s provocation and the avoidable starting up of a massive currency war by the USA are only accelerating the collapse of “Western Economies” and others - a stupid move - leading into more serious wars.  

Irregardless of the gloomsters , who say that America is finished , it still is a far larger economy than China . And may always be so . 2 dimensional projections that the PRC's GDP will surpass that of the USA by 2025 , or whenever , may prove to be utterly wrong .

Take a tip from survivalist Bear Grylls ; if the elephants are stomping all over the shop and crapping on everyone , grab a little 'phantie poo , and squeeze out some juice for yourself .


 ' is still is a far larger economy than China".....why do I think you are seeing America in the same way as a goldfish through the side of a spherical glass container. A distorted image!

Strip away the liabilities and the trillions in debt..remove the impoverished..recognise the rusty rotten infrastructure...allow for the stupid and thieving system of govt..seems to me that when you look down on that goldfish it shrinks into a tiny wee tiddler.

Sorry Gummy but you may need to see one of them optomi whatsits!

With Fiat money getting materialised with a keystroke, US treasuries at 2.5%, residential and commercial property looking shakey and precious metals through the roof, agricultural land looks to be as good a place as any to have ones money invested. I believe land prices in places like the Mid West and Brazil are booming.

Land prices have corrected here but I dont see them slipping too much further whilst our terms of trade look so positive and interest rates stay low. The outlook for agriculture is probably as positive as I can recall, there are some powerful macro trends in our favour.  Since most farmers have timelines in decades if not generations how land prices are trending in this quarter or next is of little consequence.

So sheep Shagger lets look at some dairy production figures;



Milk production in France is gauged at 8% higher
 than a year ago.  The gains are from quota increases, better weather and feed, and higher returns.  Pricing levels for skim milk powder and whole milk powder are lower and reflect weaker markets with low demand for exporting at current levels.  International buyers are slow to make future commitments and taking a more wait-and-see attitude.  No intervention bids for SMP were accepted for the lasted rounds of sellback bids.



Milk production levels are running about 3% higher
 than a year ago currently with forecasts to finish the season 1-2%  higher.  Processors are welcoming the stable milk patterns and hoping  for factors to remain stable.


Lets see where all that extra milk goes before we get too excited.  Andrew


Im not making a prediction that land prices are undervalued just that theres no fundamental reason for them to crash as sometimes opined on this site. I suspect(down here anyway) that they will tick along at around current levels as most sellers will have no need to drop their pants. If product prices did fall or interest rates rise then that might change but until then I expect its a case of steady as she goes.

SS, I forgot to add that in the USA milk production is also up, in some States by over %6. The dairy industry has underpinned the price of sheep farms in this area, with out the conversions  there will not be the money available to sheep farmers who have sold into the dairy boom to chase sheep and beef prices to unrealistic prices based on returns.

 We have had the most terrible seasons, for the past 4 years and many now think that this could be the new norm, until profitability returns I dont see farm sales going anywhere in a hurry. I am noticing a huge increase in the amount of cash cropping,  this cold season isn't helping the crops and now its dry, I never chase rainbows in farming, its the one sure way to lose thew farm, better to cut costs.

As Robert Shiller points out in "The Unlearned Lessons of the Housing Bubble", the world is NOT running out of land either for housing OR for agriculture.

If certain parts of the world got their cultural shite together, it would be all over for primary-produce-dependent countries like NZ. In fact, Brazil alone looks likely to stuff it up for us.

Trems of Trade have trended against us 4-fold over the last few decades and this will only worsen. Most of the time, NZ has been a helpless price taker on international markets. Dependence on primary produce is now the quickest route for a first world country to rejoin the third world.

Failure to diversify in directions where the real money is, is already costing us dearly. Cities are where all the growth in wealth has occurred internationally for the last half century. Yet we "preserve farmland" and constrain our cities from growing? And we push the price of land for all non-rural businesses up 10 times, 20 times, and more?

I nominate NZ for a new "Economic Darwin Award" specially devised for us.

And hey, at least farmland has only inflated 100% above what it should be. The urban planners have pushed urban land prices up more like 1000%.

Was talking to the Bank Manager this week.  He says so long as dairy farmers are cashflow positive they are letting them be - even if there is no equity left.  With the payout as it is, most of those with high debt are cashflow positive. They are 'managing' placing the worst off, on to the market. 

He did make me chuckle tho - said "I can't understand why farmers aren't borrowing again, with interest rates so low and payout so high - seems some of the 'young guns' haven't learnt anything yet.  Mind you he was also desparate to loan us some money.

I disagree Sheep Shagger with your thinking that this is a most positive time for Agriculture. We have some major problems. Perhaps the most worrying is our perception in the public eye. We are seen as rich buggers who are ruining the land. We are entering dangerous times and with this notion becoming popular the thing to watch for is future politicians capitalising on this.

Next would be peak oil, and combined with the former, who is to say we will be able to carry on as we are. We are not the cheapest producers of protein any more, we dont even grow grass as good as we used to...

Debt ridden... thats us, under a pile of mortgages owed to Aussie banks that is weighing us down like a tonne of bricks. So if anything came along to shock us,  how would we cope, not good I reckon.

As AJ points out, we are entering our 4th big dry. Maybe. Likely. As a group Sheep and Beef farmers are shockingly understocked, no stock, no production. Milk producers are shockingly overstocked...and that doesnt pan out too good either.

Our meat companies turmoil, with vast overcapacity, and some poor balance sheets. They compete with each other to the bottom of the market.

Wool, well its off the bottom of the heap, I guess we can dream.

Perhaps like you I am reasonably positive about my own situation, not so for us as a whole. Too much  debt, going into peak oil and currency wars. Looks scary to me. Just because commodities look good, doesnt mean we will end up with a good bit of the pie. I have lived on hope for so long, now I am more realistic, farming will only make me rich if it is the pleasure of living here that is the richness of my life.






PhilBest was right on the button. We have our sub prime situation like the US, except the banks and the property owners are too frightened to let the general public know about it.  Many stressed properties should have been placed on mortgagee sales, but banks did not want to flood the market with these properties fearing that they might further depress property values.  Many farmers are already in the negative equity situation.

Countries in South America like Brazil, Uruguay, Chile and Argentina have many good farm land which have not been fully developed to their full potential. It is a matter of time some smart cookies (many ex NZ farmers have been developing farms in these countries in the past years). Their cost structures are lots lower than ours (much much cheaper land, cheaper labour, utility and compliance costs).  Currently some Chinese companies are working very closely with the Brazilians to develop some very large farming and horticulture projects, it is a matter of time our farmers will face some serious competitions from these countries for similar products on the global market. I was laughed at by our farmers when I mentioned these facts to them.  Remember when Toyota started selling cars to the US, Ford and other US car manufacturers did not take Toyota seriously, the rest is now history.

Many people seem to have tunnel visions and head in the sand mentality,  it is good to think we are the best in farming, but the reality is going to be very different.  If we don't adapt to the changes around the world, sooner or later we will be victims. Our high cost structure will eventually make us uncompetitive.  The Crafar Farm is a good case study for all of us with regards to debt level, business development and management.

The Chinese and Indians are very good at managing cost, just like the way they have managed their economies so well compared to the US and EU etc. We have some serious structural, financial and organizational issues here that need fixing fast before it is too late. If China can develop their high speed train and other technologies so quickly and efficiently, as farming and horticulture is not rocket science, it will not take long before they become an expert in these fields, we will not be able to compete against them in the primary product fields. There is a storm brewing, the BRICS countries (Brazil, Russia, India, China and South Africa) have regularl dialogues among themselves, and they have long term plans in all areas of B2B activities including food production. There is no shortage of finance, technology, good farm land and skilled labours in these countries.  It is a matter of how soon they will challenge our perceived strengths on some food production, when it happens, the initial impact  will be prices of these products. By then are our farmers still competitive? For this reason,  I personally would not like to be your average conventional farmer, I will be investing in innovation (either in new products, or in new farming technologies and highly skilled and educated workers), create more links with high growth region like Asia at all levels.  May be we should start employing some of our highly qualified taxi drivers who came from India or China to help us to create market opportunities in their home and surroung countries, afterall they can speak the language, understand the culture, have the network of business contacts in their home countries. Unfortunately many business owners in NZ just don't seem to undestand this, many seem to think that English language is the only requiremenbt doing business in Asia, understanding of local culture  and language is irrelevant to their business venture in Asia. They seem to lack the ability to change and adapt to different environment.

You're right on the button too, TrueValue.

A couple of comments.

".......I personally would not like to be your average conventional farmer, I will be investing in innovation (either in new products, or in new farming technologies and highly skilled and educated workers)......."

Simply using your cheap farmland for something normally associated with cities, would be a start. Especially farmland adjacent to a city. Only the urban planners stand in the way of this. The government should get them out of the way.

".......The Chinese and Indians are very good at managing cost, just like the way they have managed their economies so well compared to the US and EU etc. We have some serious structural, financial and organizational issues here that need fixing fast before it is too late. If China can develop their high speed train and other technologies so quickly and efficiently......"

Transport infrastructure is just hugely important to an economy, it is economic nonsense to limit the amount you spend on this, to the amount of petrol tax you can extract from car drivers. I think many emerging economies understand this while most of the first world has forgotten it. That alone will put us behind them eventually if not addressed.

Lock down, corn, silver, Sugar next  milk?

I agree with Sheep Shagger.  If the ROC remains reasonable and cashflows are positive - there is no reason for land prices to crash. 

Unlike most of you I probably have reason to be fairly disillusioned with the industry -  I have recently purchased a dairy farm (with a fair bit of debt) and have a gold kiwifruit orchard that has been sitting under restricted movement notice for two days due to the PSA scare.

Granted there is a fair bit of risk involved in the industry - and while there may be a few write downs in the kiwifruit industry if the PSA takes hold and adversely affects the value of land - that's life. 

As the dairy industry stands - we budget conservatively and price in interest margins that are 20pts above where they currently are.    While equity changes may eventually effect the wealth of my children (positively or negatively) that isn't my immediate concern.  Unlike some commentators on this site - we aren't all greedy and in for the quick capital gain (dare I say property investors).   Compared to my last job working in corporate Melbourne - the farming vocation wins hands down - even if life throw us a pile of shit called PSA every now and then.

If you went into debt any time this side of 2005, I suggest you didn't do your homework.

Not sure if you're a first-timer here, but some of us mention that energy underwrites all activity - when the supply of it reduces, in either quantity or quality or both, your debt gets increasingly unpayable.

And all the IEA posts there recently.

That dark-blue is the reality - that's the fuel for your debt. See if you can think of any economic activity that doesn't need energy, and how many use oil? Look at the drop-off - how long are you expecting to take to repay?

The light-blue is a face-save mostly - they are backpedalling from optimism to reality!

My son is looking at buying land - I suggested he buys what he can afford, thus not vulnerable, foot in the door and can trade up if all goes well. No loss if not.

Debt is a reliance on the future being able to repay - so many folk don't investigate the future and just sail in as if tomorrow will be the same as today.....

Been away for the weekend in magnificent Southland. If theres a better place on the planet for pastoral farming( excepting the recent storm) id love to see it. Grass for miles, stock looking fantastic, told the wife it was farmer porn driving through such lush surroundings!


Phil Best, your idea of urban sprawl being NZs saviour makes no decernable sense to me.

True Value, you make a fair point about Brazil in particular. They will develop fast and be huge influence, they also have water which is where NZs comparative advantage lies and where many of the other countries mentioned do not. Look at the effects of the current Russian drought to see an example of a country with massive potential unable to be consistently realised. Australia also, trying to work out how to cut back 40% water allocation to the Murray, Darling Basin. China has massive water issues both quality and quantity which will severly restrict its ability to feed itself.


The world needs Brazil. I as a human being find the spectre of people starving as unacceptable. The planet is groaning now and need to find enough food to feed 3 billion extra people by 2050 is extemely problematic. New Zealands future is not to compete with the Brazils in the commodity game it is to be a supplier to the high end. We have the ability because we are small and nimble and importantly  own and control our own co operatives and hence our own destiny's. A situation I hope we have the foresight to protect.


As for peak oil. It seems to me that agriculture is hedged against oil price hikes. Given that the price of oil moves corn into ethonol and the chain effect of that through stock feed costs and hence production. So in effect if one believes in peak oil and population growth then an investment in NZ pastoral land might be abit smarter than the doomsdayers here give credence.



Typical NZ "backbone of country" business:

Farm: thousands of hectares, sheep or cows crapping all over it, profits for farmer $100,000 per annum, jobs provided, 6 jobs at $30,000 per year. Export income, $2,000,000 per year.

Typical German "backbone of country" business:

High tech manufacturing business: one acre; profits, $2,000,000 per year; jobs provided, 20 at an average wage of $80,000 per year; pollution of environment, negligible; export income, $20,000,000 per year.

Spot the reason that one country is rich and getting richer, and the other WAS rich once. Now explain to me why someone who might start the latter business in NZ today should have to pay $2,000,000 for his one acre of land, and the farmer can get thousands of hectares for less. THIS the result of nothing more than council urban planning policy.  

By the way, one really good article once claimed that Bill Gates would never have got started if he had had to pay "post urban planning" California land prices for his first premises, rather than the "pre urban planning" prices he and other Silicon Valley entrepreneurs DID pay in their day. Now does the thought not scare you, about how many Microsofts (or even Gallaghers or Rakons) NZ might be missing out on? (California is losing Silicon Valley businesses hand over fist right now, to less stifled, less anti-business States and countries).

One Economic Darwin award, coming up.

PB I am intrigued by your $30,000 wage for a farm employee. At a basic level a dairy farm worker, works an average of 54hours per week.  At minimum wage rates that = $35802 and that is the absolute basic.  Most chaps I know after working in the dairy industry for a couple of years expect $40-50k depending on level of responsibility.  There is one large herd manager that I am aware of earning around $180k. I would also hazard a guess that farming would employ more downstream workers than your tech manufacturer.

Where I live you could buy an acre of industrial land for less than $2m.  Sure it is in the provinces, but hey it's one of the sunny ones- 20 people is not a large business so doesn't need to be situated in the main centres.

There is nothing stopping high tech businesses setting up in NZ  - look to the companies that have done so.  They prove that where there is a will there is a way.

As SS says - why the them and us?

I spoke to a young couple today who less than 12mths ago relocated to Europe on internal company transfer, but who are now considering moving to Dublin for work as the company he works for is relocating to Dublin because of the tax breaks and better IT infrastructure than where the company presently has an outpost. To rent a nice house for them and their two kids will cost them €1600 per month.  They said they were surprised at the high cost of living over there when they went over for a look see.  But then the minimum wage there is considerably higher than it is in the UK where they originally come from. Even after taking in to account the higher costs, they will still be considerably better off  in Dublin than in the UK as his wages will be considerably higher than he would be getting if he relocated back to the UK.

PB, $2m per acre seems a rather extreme figure. I would hazard an uninformed guess that there is plenty of unutilised industrial zoned space or available premises available at far less, without having to gobble up yet more valueable farmland. However I try to make a point of not making bold statements about things I know nothing about so perhaps that unbelievable figure is right and then you have a point.


The thing I always struggle with is why does it have to be a them and us situation with agriculture. Opinions to this site regularily decry farming as if it is at the expense of all else. I concede in some situations there is potential conflict but in essence the non performance of other parts of the economy is a seperate issue specific to the sectors involved.

"........the non performance of other parts of the economy is a seperate issue specific to the sectors involved....."

Quite right. This is not a "do farming OR do manufacturing" argument. The amount of land in NZ used for farming is around 80 times as much as what is used for urban land so far.

We would actually need a populations of about 80 million people, before we ended up actually NEEDING to "conserve farmland" to "feed ourselves". The "conserve farmland" argument, is nonsense when you compare as I did above, the potential alternative uses of the land for earnings and export. We could use around one eightieth of our current farmland, for industry (and for homes for its workers) that would earn the country literally hundreds of times as much as the farming activity it displaced.

The "conserve farmland" argument is just an excuse used by councils urban planners who have not the first clue about economics. There is really no reason to blame farmers for this, and I do not mean to do so.

Farmers who own land that COULD be developed for housing or urban uses, SHOULD be keen to see it happen, because they will be able to sell their land for a lot higher price.

Farmers who own land that COULD be developed for housing or urban uses, SHOULD be keen to see it happen, because they will be able to sell their land for a lot higher price.

PB: what you need to realise is that not all farmers WANT to sell their farms, despite what it might be worth.  Some of us actually like living only 15-20mins from town and do not WANT to sell up only to have to move to some more remote area with fewer services.  And some of us do not WANT to give up our flat fertile land for rolling/hillier less productive country. 

I never said anything about forcing you to sell.

I am all for "mixed land use". I love looking on Google Earth, at areas of Switzerland and Germany where you have farming, housing, and industry all mixed up together. That's what happens when you "ALLOW" it. Our planners DON'T.