Fonterra has announced a 30c/kg cut in its forecast payout for the current 2012/13 season to NZ$5.65-5.75/kg before retentions, mostly because of the depressing effects on revenues of a strong New Zealand dollar.
Fonterra said the revised forecast comprised a lower farmgate milk price of NZ$5.25/kg, down from NZ$5.50/kg and a lower forecast net profit after tax range of 40-50c/kg, down from 45-55 cents per share.
The New Zealand dollar fell 20 basis points to 80.68 USc on the news.
Fonterra Chairman Henry van der Heyden said most of the downward pressure on the milk price forecast was due to the continuing strength of the New Zealand dollar.
“We’ve actually seen improving prices in recent GlobalDairyTrade (GDT) trading events, but the strength of the Kiwi dollar is eroding any gains,” said van der Heyden said.
Milk powder prices in Fonterra's GlobalDairyTrade fortnightly internet auctions auction had risen 4.1% over the past four auctions, underpinned by a 7.8% rise on August 15. " However, prices are low compared to a year ago and the New Zealand dollar remains strong against the US dollar," Fonterra said.
Fonterra CEO Theo Speirings said Fonterra’s consumer businesses were under pressure due to unfavourable foreign exchange translation effects in many markets, and a difficult retail environment affecting the Australia-New Zealand business:
“Accordingly, we have lowered our forecast net profit after tax range to 40-50 cents a share," he said.
Spierings said the board had decided to maintain current advance rate payments to farmers. This would mean no change to farmers’ cash flows, he said.
Spierings said there appeared to be some early signs of strengthening dairy prices, partially driven by global weather events.
“A serious drought in the United States is pushing up the price of grain, which seems to be affecting dairy production and tightening supply. Weather conditions in Europe, with extreme wetness in the northern regions of the continent and a heat wave in the south, are also impacting grain production. The Indian summer monsoon is also off to a slow start, with rainfall about 20 per cent below normal,” he said.
These factors were contributing to some of the firming in global dairy prices, however, Mr Spierings said any gains would continue to be impacted by the strong New Zealand dollar.
“Our forecasting anticipates some recovery in global dairy prices but we don’t know how strong this recovery will be or when it will kick in. For this reason, our farmer shareholders should continue to plan cautiously.”
98 Comments
Fonterra Chairman Henry van der Heyden said most of the downward pressure on the milk price forecast was due to the continuing strength of the New Zealand dollar.
“We’ve actually seen improving prices in recent GlobalDairyTrade (GDT) trading events, but the strength of the Kiwi dollar is eroding any gains,” said van der Heyden said.
Absolutely nothing to do with worldwide excess supply caused by excess supply of USD making it cheaper to create that supply?
Is van der Heyden implying we should create excess NZD debt to combat this situation beyond our current ability to repay that already borrowed? Is this man sane?
This Dallas Fed article brings these matters into focus:
Assets purchased with created credit, both real and financial assets, eventually yield returns that are inadequate to service the debts associated with their purchase.
It would be aided by the price of land and the cost of compliance reducing.
We could for example introduce a voluntary land value re-valuation programme - which could be taken up by agricultural landholders as a means to reduce their property tax burden. I recall a FF person once stating that a particular small dairy farmer was 'milking for the mayor' three-four months out of the year. If you could voluntarily take a reduction in your land value and hence reduce your rates burden to only say, the equivalent of one month's profitability, it would likely be an attractive option for many rural landholders. The price of land might then over time would begin to better reflect its actual capacity to produce a profit.
Land valuation today is largely based on the level set by speculators, as opposed to producers.
The property tax saved in such a re-valuation could be tied to a mandatory debt reduction programme for over-leveraged property owners as a means to also aid in bringing down private sector debt.
Yes, reduce their rate take but forget about asking "them" to agree. Such an initiative would have to be legislated. There is a LGA Bill in the house at the moment. Piece of cake for the government to get this type of initiative in as well.
Simply a matter of Key's government having no capacity for thought outside the neoliberal prescription and no concept of how to implement a programme of change beyond incrementalism.
Even if one hands them a virtual blank canvas on a plate and a population with a real sense of community-mindedness (CHCH) they absolutely undermine creativity and alienate the population.
The worry is the next election won't come soon enough - it can get a whole lot worse in a very short space of time.
Largely because of the high dollar...? well they were not complaining prior to the TAF vote which brings us full circle to the DIFL submission.
www.comcom.govt.nz/assets/Dairy/Dry-run-review-2012/DIFL-Dry-Run-Submis…
Danger snowblindness in progress.
Sorry it wont actvate as a link but just paste it in and go you will see the header John Groot.
I think Stephen, they certainly revised their position but not necessarily to protect their position , if you follow
Corporatise it..... bastardise it .....shift the power ...repackage it... relist it ...hey presto..!
And to think Henry didn't even throw in some free paddles.
I hear that some of their TAF roadshow presentations to investors/lawyers/accountants/bankers have not being going too well. Some accountants and lawyers have been raising questions that they don't have the answers for, which in turn have spooked the investers/bankers.
Heard a comment the other day that the PRC investment vehicle were interested in buying up max units allowed - but have been spooked by the division in the shareholder base.
I really would like to see a number who have not read it, paste it in and read it , it's a pdf takes a coupla seconds.....for the enlightenment thereof.
www.comcom.govt.nz/assets/Dairy/Dry-run-review-2012/DIFL-Dry-Run-Submis…
John Groot.
Thanks Christov....what does it mean. Excuse my lack of comprehension, especially considering it concerns my livlihood, but Geoff Taylor could have communicated his point a bit more clearly!
I didn't realise submissions were made directly to the commerce commision.
There seems to be a currency speculation theme in this submission; can anyone confirm if Geoff Taylor is a business associate of PM key?
Any thoughts on Taylors reference to 'competitive market economics' (which probably underpin the justification for the CC and any associated unethical practices), given the spectaculary unsuccessful success of neoclassical economic theory, which appears to be fundamentally flawed as is increasingly accepted since 08 financial crisis (eg Steve Keen, Ha Joon Chang).
Omnologo.....Quite the reverse actually , Taylor argues the inclusion of Forex trades by Fonterra or losses brought frorward have a major effect on the perfect notional price of milk.
I'll leave it to Steven Hulme to do the ins and out of it for you as I only see the effect on the big picture.
so here it is for those who were a bit busy to have a go see..
Subject: Attachments: FW: Milk regulations dry run and TAFOIFl Submission, Review of Milk Regulations (Aug 11 ).docx
Sent: Thursday, 5 April 2012 10:06 a.m. I hope that you can accept this email as a submission on the dry run ofthe milk regulations. I understand submission are due today. Could you please reply to confirm your receipt of this. 1. This submission is on behalf of Dairy Investment Fund limited (OIFL). 2. DIFL has investments in Open Country Dairy (OCD), Kaimai Cheese and Grate Kiwi Cheese. I am aware that OCD and Talleys are giving submissions. 3. .1 hav read the submissions posted on the MAF web site and make the observation that most the submission focus on the outright price of milk and there seems to be an acceptance that the perfect notional competitors milk price will be higher than the actual commodity milk price achieved by Fonterra. I will not add to this debate other than we support the OCO observation about the perfect milk milk price being too high for independent processors to get a return on capital. 4. This submission highlights risks of a Fonterra competitor having a hybrid milk price built up a notional U5D sales revenue, notional cost overlaid with an actual FX hedging result from Fonterra. 5. My understanding is that the notional elements of the milk price could be made transparent. We all agree this is important. In contrast with this the- FX hedging overlay appears to be an outcome from an fx policy using a discretionary/active approach to volumes and tenor of hedges. 6. ,The hedging results affect the milk price materially and are in arrears. This is a significant barrier to entry. 7. The size ofthe FX variance, the timing ofthe fx effect (being approximately 12 months in arrears) result in a volatility of gross margin that in turn results in much. higher cost of capital than would normally be applied to the industry sector. ' --- ' -' 8. I attach the key points we made in a submission in Sept 2011. They remain relevant. 9. I highlight one other key point. Fonterra's FX hedging objective is commonly referred to as smoothing the fx rate (taking off the peaks and troughs of an fx cycle). Generally it achieves this however the particular concern to us is that the hedged return (the current milk price) is more volatile than the unhedged milk price. This finding is explained by the increasing correlation - between US WMP pricing and the NZD/USD exchange rate. Put simply if US WMP prices rise ',.. then so significantly does the NZ Dollar and vice versa. So it is highlv likely that the NZ milk price has hedging gains when US WMP prices rise i.e it increases the size of the peaks and trough of the NZ milk price. 10. We submit that the NZ milk price should not include the FX hedging gains and losses of Fonterra. Soory about the word wrap , it was a pig to get it on here.Well if our farm output is seen as a luxury, surely it will command a price premium? yeah!!!
What it appears you dont get Walter is with peak oil anything that doesnt produce energy but consumes it is in dire straigths. Competitive usually means extracts something more efficently...
regards
Steven I’m not here to correct other people all the time. For the last 3 days I have read many articles of how the shortage of fresh water will dictate agriculture prices. Oil of course poses a similar outcome.
So the farming community/ industry needs to be prepared for changes - are they is my question ?
One example: 25.8.2012 Food shortages could force world into vegetarianism, warn scientists
http://www.guardian.co.uk/global-development/2012/aug/26/food-shortages…
Force? No, go back to 2008, haitians were making mud cakes (Im sure you can guess the main ingredient) to eat as they were starving.....I dont recall Americans for instance foregoing a hamburger or 2 to help them. Or stopping ethanol production to ease the plight of starving mexicans as corn had got so expensive.
Frankly if you are OK you dont seem to give a stuff about anyone else seems to be the name of the game.
That piece ignores what the world's oil output will be in negligable by 2050....not 9billion Walter, maybe only 2 billion.
regards
Steven again don’t see the world only from your point of view, when commenting. It is a fact that we have a strong “meat eating” society. So, as the article suggest people in western country will be forced to make compromises, which is by the way fine with me. I’m not a “meat eater”.
As I confirmed before peak oil will be an important player for most industries anyway. Right now I’m talking particularly about climate change and water shortage, which doesn’t mean ignoring other influences.
Found this by chance a month or two back. Niwa's work on crops and trees species.
Not if the OIO have anything to do with it....... ngakonui gold
Typical Fonterra strategy. Start the season low with a negative outlook and then raise steadly throughout the year.
Watch as the cost of animal feed in the USA (esp Corn) reduces the overhang of WMP/SMP later in the year.
Oh but sorry the regulator says Fonterra's milk price is based on the efficient competitior. Yeah Right
If anything the payouts seem to have been optimistic the last time there was a big drop in 2008 (judging by the historical graph here http://intelact.com/tools/charts/item/84-fonterra-milkprice). The June 2008 forecast was for $7.00 then dropped to $6.60 in October, $6.00 in Dec 2008 and finally 5.10 in February 2008. The final payout for the year was $5.20. So if things happen the same way this time around the final payout might only be around $5.50 odd. Which makes me wonder how many farmers have their budgets based around a payout of more than $6.00 or so...
A significant number of dairy farmers (mainly the multiple property owners/recent conversions) require a $6 payout to breakeven. Also what isn't widely taken in to account is that not all Fonterra suppliers are fully paid up shareholders, so will only be receiving the milk price of $5.25. Some of them will be required to buy shares at god-knows-what price at the end of this season.
Is the market even returning $5.25 at the moment?
A problem for Fonterra is that it has to accept all milk from anyone, anywhere who wants to supply it. 100 new conversions on stream this year - most supplying Fonterra. Word is that there are 100 more sheep farmers enquring to convert for next season due to what they perceive as poor viability if they continue on their current practice. That's lotsa shedloads more milk. Fonterra got caught completely unawares of the huge increase in autumn milk production due to good grass growing conditions in most of its supply area.
Interesting read on Dairy is the Rabobank Global Focus Report - NZ Dairy From a Torrent to a Trickle
Cant see the conversions happening at these sorts of price levels - Weve battened down the hatches in a big way in March - word was out in Feb 2012 that the milk job was toast - it took along time for Fonterra to tell their shareholders while they played a game with TAF.
I guess it means lower interest rates for longer in NZ - the NZ$ is back a whole 40 points on such bad news, last time this happened in 08/09 the kiwi fell below 50cents - cant see it happening this time though.
It will certainly be interesting to see how many of these conversions eventuate, Grumpy. Thing is a lot of these sheep chaps have little or no debt and farm succession is something they are also finding hard to see if they stay with sheep. A $5 payout certainly would change the figures for those intending to borrow heavily for it. They are not looking to sell, but to convert and run the farms themselves. Time will tell.
I told some farmers earlier on in the year to budget on $5 and also do one on $5.50. They laughed at me. Doubt they find todays announcement funny. I beleive Fonterra was playing Good NZ Inc player in holding off so long in announcing this lower payout. As you said it was easy to see a while ago that payout was going to be reduced based on fundamentals.
True Grumpy. We used to be able to trust information/advice given to us by bankers, can't anymore. Used to be able to trust our co-op dairy companies to keep us informed first and accurately - can't anymore, that information is now owned by the NZX and they have first call on the info.
The trouble is these types of conversions have got no idea what they are getting themselves into - long hours 24/7, low quality staff, unstable payout, ever increasing FWE, pest and disease risk (BVD etc), climate risk, low quality drug using staff, longer hours.
Unless they are a well established family with sound business principles and are based in a well located region with a top piece of dirt and respective climate and they are prepared to do the hard graft for 5-10 years, I would be saying sit on the fence and sell the farm to the next fool (I strongly believe in the greater fool theory) that comes come along.
Even with little debt as a sheep farmer, unless theyve got lots of cash their borrowings to convert are still very high +$20/kgms - theres no money in it at these payout levels.
The market has/is pricing/discounting farm values based on location, schooling, soils, climate - as new farmer conversions work through a few years of grief they will adjust by getting out if they can - there are only so many people that want to go dairy farming these days specially so in poorly located areas - perhaps that explains why so many dairy farm staff these days are keen young kiwis but desperate foreigner's.
And the NZ$ is back up 20 points with all the great news out from Fonterra!!!!
I believe we as a country are underestimating the underlying strength of our $ v's the US$.
Unless we see very large increases in commodity prices (?) we have a very real problem ahead of us as a country.
If sn inflationary depression occurs in the USA and Europe etc we in NZ will only benefit if soft commodities prices lift more than the NZ$/US$ does - how likely is this???
CO will the new conversions supply Fonterra or a competing cooperative or investor owned processor? I know who I'd be supplying if converting in Canterbury.
I agree the Rabobank report makes interesting reading, a bit different from 'outlook volatile but plenty of upside'. 'From a torrent to a trickle', this title provides relevance and context to concerns regarding resource constraints alluded above. Hayley thinks increase per cow efficiencies will drive NZs production increase to 2020, and corporatisation of family farms will continue due to attaraction of economies of scale and difficulty for family farms to facilitate succession despite the end of capital gain and apparent return to cashflow?? It will be intersting to see how the corporates increase per cow efficiencies. A significant family owned corporate over our boundry thinks that family farm scale succession difficulties will play into his hands as far as ongoing business growth goes, but I wonder about ability to increase per cow efficiency given the per hectare focus.
"In New Zealand it has been primarily milk that has driven the NZ dollar up, with the same impact on the wider export sector. Between 2007 and 2011 export sales by those companies selling more than $25m (176 in 2007 and 230 in 2011) increased by about 40%, for all other exporters (12,523 in 2007 and 12,205 in 2011) the increase was less than 2%. Our broader export sector is failing.
It is positive that New Zealand has Dutch Disease based on a renewable resource, but the downside is that primary production generally produces low margin returns and requires a substantial asset base. New Zealand farmers are more property developers than producers. All the margin from a farm must do is service debt to the point where one owner sells out, collecting a tax free gain. In fact, without such a tax concession*, farming would hardly be a viable proposition.
A typical dairy farm in 2009/2010 carried approximately $6m of assets, $3 million of debt, earned $850,000 in revenue, paid $115,000 of wages and paid around $11,000 in tax (the average share-milker paid tax around $33,000). A software business with double the revenue would have no debt, has $100,000 of assets, pays $600,000 in wages and pays $100,000 in tax. The New Zealand version of the Dutch Disease has made us poor - farming is generally a low margin business so there are fewer spillover benefits to the wider economy."
http://www.johnwalley.co.nz/181-dutch_disease_fatal_to_innovat.aspx
Updated numbers in comment, but it doesn't change the fact that farming is a wee bit less than, "the backbone of the NZ economy". It's more of a backbone to the Auz banks' profits than it is NZ. Good for the few ...
* Subsidy anyone?
I see no change ahead.
Cheers, Les.
Might be a good time to enquire of Sir John or TSY how their expected 8.5% compound growth in agricultural exports is tracking ( from $20 billion to $58 billion over the period 2012 to 2025).
And these guys 'independently' confirm that expectation:
http://riddet.massey.ac.nz/sites/default/files/content/A%20Call%20to%20Arms.pdf
Probably. Diarrhea, maybe:
http://www.stuff.co.nz/national/health/7564883/Council-criticised-after-Darfield-outbreak
"Board medical officer of health Alistair Humphrey said more than one barrier had failed, resulting in the ‘‘serious outbreak’’.
‘‘Intensified farming now means that a lot of water is contaminated with animal faeces, especially the Waimakariri after heavy rains, and secondly, the chlorination of this heavily contaminated water fell short of levels required to make it safe,’’ he said.
The importance of protecting water from source to tap was ‘‘sometimes lost in political imperatives’’.
See comment stream.
Dairy farmers here in Ireland are getting around €0.28c per litre, here the gross farm expences are around €0.25-2.28 cents per litre then you have debt servicing on top of that. No wonder dairy farmers both here and in the UK are throughing the towel in. Bear in mind these returns are inclusive of EU subsudies. It seems that supermarket competition has driven the retail price of milk down some 30% over the last 12 months and the farmer has to wear these market pressures.
If the kiwi $ stays high will the nz dairy cockies buckle also, I doubt it? But if the banks apply pressure you may see some carnage?
Once again thanks Christov, I appreciate your efforts and patience in helping me understand that which does not come naturally. Apologies to G Taylor if I misrepresented him in any way. Fonterra executive make a point of explaining Forex in the context of the business, but like the directors my comprehension isn't the best. By the way anyone know what notional value does it actually add to our milk?
I see Geoff Taylor is associated with OCC and spin offs, in in that respect I have a scepticle view on his idea of what is a competitive market, it's purpose, and for whose benefit. Is it for the NZ consumer, the supermarket, or us farmers? After TAF, I've no faith in farmers.
So what is a supplier share really worth?
when will that be marked down, or will they argue its actually worth more (thank you Alice)..
Previously they have not tounched the "dividend".
Another probelm is that fonterra is saying its brands in NZ/Aust are earing less money because the supermarkets are paying less (this is taking away fonterra earnings).
Why has fonterra not addressed this, it has been going on for 2 years now.
This is a fonterra problem and channel to market costs, not our fault....
Or is Alice running that too..
P.S banks lend 100% of the $4.52 fonetrra supplier share.
Another probelm is that fonterra is saying its brands in NZ/Aust are earing less money because the supermarkets are paying less (this is taking away fonterra earnings).
If that is the case then the associated good will (Fonterra Brands: Australia and N.Z.) has been impaired and Fonterra should be writing that down.
what a pack of doom merchants many of the respondants to this topic are !
these doom merchants keep rewriting the same old , same old...
`farmers are gonna go broke etc'
guess what folks....what happens when farmers incomes are cut is they have less to spend...the rural towns/service people will be the first to feel the chill...then gradually the cities..
oh wait..of course..the cities dont need farmers income...they make money from software companies, selling cappucinos, BMW's and houses.
l
Yep subject to the season we get theres plenty looking to to drop out of high input systems - but its the same old story, most are to slow to do so (or to greedy) so they will hold in there not knowing what their marginal cost of production is and praying each day that the payout goes up and that the bank manager wont phone them up.........
Yes Grumpy,
we dropped PKE from our system when the writing was on the wall back in the autumn, and we're sure happy about that - look at the import companies whacking the price up now the first of the grass has gone! ($322/t today - no room there for any profit on a DM basis)
We wintered at home on all grass, used baleage, and our cows aren't as fat as usual, but they are milking a hell of a lot better!
I think NZ farmers have lost sight of what makes farming profitable. And all that feeding out loses damned good workers. Sure you do great per cow production, but the cost and results need to be very carefully monitored.
The bank is sure happier without feed bills coming in.
Yes Cowshit,
In the very rural town i reside in there will definitely be a reduction in new holden sales,new boats and probably less overseas travel for these poor farmers while they try to recover.
I have to listen to them in the Hotel crying into their beer about how tough it is as they wander off in their new car as I leave in my five year old vehicle.
Theres plenty of low input low stocking rate farmers making good money still.
Some fall over through over commitment,just as in property development,share leveraging etc.
Thats Life for the risk takers/entrepeneurs amongst us.
postcard from warrnambool
Just spent a weekend out in warrnambool, a major dairying area in victoria. Only realising it was so as we arrived by train, travelling through the countryside, was questioning our guide about the extent of the industry. Huge was the answer. (spent a lot of time on dairy farms in my younger days. Only thing I never mastered was how to hand strip a cow). All the original family farms have gone, either amalgamated or gone corporate. Only a few families still hanging on doing under 100 cows. The rest range from 400 to 1200 cows. All electric. All computerised. Milking 300 per hour. All cows tagged. On entry to the milking position, the tag is electronically read and registered, activates need for any medication (hormones?), how much feed to give them. They're fed while milking. Computer logs the milk yield and out they go. Strewth. Is that what's happening in Canterbury and Southland?
if individual farms were valued on a NPV basis based on CGU as most businesses are now, then i suspect land values would plummet.
banking covenants, farmers, and the trading Banks would be on very shaky ground. as would the rbnz and NZ inc as a whole.
how farm values avoid this downward valuation is beyond me. i suspect everyone involved here has there collective heads in the sand.
what annoys the hell out of me is that there appears to be one rule for farms and another for all other businesses. this has lead to massive distortion.
Anyone with half a brain knows that farms are overvalued, that they pay f&^& all tax, and that the only real benefit to the farmer is the capital gain , and for NZ inc. the export dollars.
misty, i agree with your comments but i think you miss the point.
i was trying to highlight the absurdity with respect to LVRs. the banks have a vested interest in farm values rising higher and higher.
also the RBNZ determines risk weightings on what banks can lend against farm assets. these are very low. Slight deviations in farm values would blow most of the banks apart and the RBNZ for that matter.
I want to know what the RBNZ is doing about it?
kano2 - Part of what your saying is correct but the key difference between a farm and a business is that most farm investors see less risk in the farms future income than they do in the business.
From my experience this is because farms will tend to continue to produce a product and hence income forever whereas a business is limited to the life of its product (and staff) which in this world of constant change this may/will only be for a limited period.
Farm products also tend to be seen as a pure necessity as we all need to eat whereas a company such as Mighty River Power is likely to have a limited life as and when we develop new power products.
The issue of low yields or cap rates people pay for farms is always (and will always) be around, however most that have bought farms in the last 50 years have done very well when they take the yield and capital gain into account.
Maybe the same will happen in the immediate future as the world moves through the next level of population exponential growth - we as farmers do not have the resources or ability to keep up with such growth - so I guess/hope in time we will see the supply demand effect on our product price and land values.
Grumpy, you make some good points often overlooked here when land values are being debated. The finite(and reduceing thanks to the likes of Huge P and his urban sprawl lunacy) nature of the resource, the absolute certainty of (growing) demand for its output and the overlooked fact that has already corrected 24% off its 2008 peak make land as good an investment as ever.
There alot of focus on the highly leveraged businesses but the vast majority of farmers who arent will have been ticking over nicely for the past couple of seasons. If those indebted businesses go under sobeit, I thought an important part of capitalism was to allow failure and for markets to self correct?
As for Les Rudds comments about the high flying software companies produceing high turnovers from small capital bases, thats all well and good while it lasts but what happens when their software is superceded by the next cab off the rank? Whats a second hand computer and abit of used office furniture worth these days...?
You mean like allowing banks to fail who lent in excess of productive value on land to so called farmers, that farm capital gain and yet talk about the great lifestyle? Well I suppose if Chinese capitalists are prepared to pay what they pay and can partner with Landcorp to add value in excess of what an average family farm can achieve, well that's the value right SS?
I'll hazard a guess that even an optimist like Keynes would scoff at the notion of what capitalists refer to as free market economics!
Alll banks do deals in excess of the farms productive value - the key to the banks is dear I say it - DEBT SERVICING. The only farms that sell for close to productive value are poorly located with bad climate, soil type and no services - these farms also have very little capital gain compared to a farm on the edge of a town.
I agree Grumpy, and that is what I wanted to debate in context to Sheep Shaggers reference to overleveraged cockies going belly up in a capitalist free market ('allowed to fail' or something). Same for the people who fund them. Don't need to sell our soveriegnty (foreign investment) or expect tax payer bailout, just because people speculate on land values, you either bankroll it (cashflow) or not.
But they do, bend any rule rule, lobby any policy maker, do what it takes to avoid taking a loss (their taking a loss) - remeber when the lengths banks went to avoid paying tax with the odd preference share deals, and the action the govt. needed to take....
We think its only if the regulator steps in with the loss part of capitalism kick in...
Think of the situation we have with just a couple of banks, the finance compaies were too small and too many to avoid failure, the banks are reverse, and use their power at will.
Don't forget the other feature of capitalism, the moving to near monopoly position in order to maximise and protect profits.
Omnologo - The problem is/was that essentially this time around (Post 2007) from the Governments eyes (both in NZ and elsewhere) various industries were "to big to fail". and as a result of that perception they have been supported by Government at the expense of deposit holders and the middle to lower classes.
Is this fair? It depends what side of the fence you site on. To have the 40% of the NZ farming sector placed into receivership certainly wouldve had a substaintially effect on some farm values and bank balance sheets/credit rating as well as the introduction of further offshore investors.
Given the issue's happening in the world at the time then NZ Inc has probably made the right call to slowly manage the crisis and hold land values up by not flooding the market with mortgagee sales while waiting for product prices to track back to more normal levels. Which is what has happened.
From my point of view I wanted a bigger crash as I was cashed up as I believed we were in a big bubble, we did however manage to secure a couple of great properties at what I hope was the bottom of the cycle based on my 50 year analysis of NZ property values.
What I am concerned about though is if NZ doesnt crank up its money printing press to match whats happening in the USA and/or soft commodity prices dont lift as fast as our $ rises (as is happening right now) then weve got serious problems ahead as an exporter nation.
Mist, not sure what you are getting at in respect to "undercutting farmgate prices"and "Very nasty anti competitive behavior" ? By whom too whom? Dairy or sheep and beef?
As for returns I have no doubt competent moderately leveraged sheep and beef operations are making returns easily comparable with after tax term deposits at the very least. I know I am and im not in anyway claiming to be a top 20% operator.
Most people around here are owner operators so the wage issue I donnot know alot about. However like any industry if you want to attract and retain good staff you pay them well and look after them or they simply move on I guess. If you dont feel properly remunerated that choice is yours. I have a brother in law in the dairy industry who has taken it up in his late 30s with no experience and is after 4 years manageing a large unit for a wealthy expat and doing extremely well for himself.
As for owner drawings, personally we only take what we need. Remembering alot of stuff like house, phone,electricity, fuel etc is to varying degrees covered by the business as tax deductable expenditure. Obviously we supply our own meat and have a vedge garden... all those things add up. I would far sooner put surplus funds back into the farm than blow them frivolously. Its a multi generational mindset of building up the asset.
Nice work for ten to seven..
Over the last wee while we have been thinking of business valuation more in the way one values cyclicals. This helps us look at spending on capital or process improvements (which can be on current acc).
This is because we think we have a business subject to commodity price cycles.
(and why we are not that pleased by fonterra types that try/ed to say/crowed "its a new word" and "high prices are here to stay". We think most fonterra income price movement is commodity related/commodity style, even the ANZ brands business as its selling into Cole/Wworths). - another story
Your method seems more a cost stacker - it seems more a utilities type business view.
Can you run thru how it works.
Say you have a property worth $21m (land, shares and stock), at global lvr 50%, the loan is $10.5m
Is that what you mark at 7%?
Do you put a the equity (also $10.5m in the bank fo dep rate of 4%)?
We don't like this cause if we that amount in cash, we would put a couple of million into gear to work on earth quake jobs, or otherwise ag contracting earning way more than bank deposit (and we could finance those as well) ....
Anyway, that aside, what happens next (assuning you are running Canterbury irrigation).
And what happenc yr to yr as payout drops?
@Grumpy, From my experience this is because farms will tend to continue to produce a product and hence income forever whereas a business is limited to the life of its product (and staff) which in this world of constant change this may/will only be for a limited period.
The Sun being the key ingredient making this statement the truth. It's bloody free forever.
thanks Grumpy and Mistyeye for the heads up.
i could go on all day why farms are overvalued and you both seem to be in agreement - so no argument from me.
all businesses involve a ROI this is the very basis of leveraging off assets. the new accounting standards place more emphasis on CGU and DCF for determining asset values especially in light of NO market.
A couple of years back there were what 23 farm sales in 12 months. personally i would deem that to be NO market. So did farms around the country revalue on a DCF basis then?
That would give a true value based on straight cashflows and I would have thought this type of correction would have been good for all concerned. ie bring values back into allignment with normal business valuation thereby improving ROI etc.
Didn't happen. prices came back 20-30% but have virtually bounced back to pre-recession values
ffinally no business is guaranteed a return forever - take the power co's which we take for granted, have monopolistic positions, massive barriers to entry etc..
Well apparantlly some startup out of silican valley has come up with some transparent paint that you put on your windows that is both inexpensive and highly effiicent that could overnight wipe out all generators.
what impact might this have on the governments SOE power co. float?
cash is king, and the new mantra for valuing businesses is cash flow. cheers,
Fair enough Kane02, you believe cash is king, so hold cash. Im happy having the majority of my investments in land, so there you go, we're both happy! Must go now, beautiful day down here to be lambing and calving smelling the fresh grass and enjoying the vista's of rolling green hills. Be sure to enjoy looking at your bank account and counting your ROI's!
Kane02 - sorry mate I cant agree with your logic. I guess I was one of the lucky ones who was a buyer in the "NO Market" period you spoke of, at the time the payout expectation was south of $5 and the 5 year rolling average was approx $5.80.
In the farms first year the payout went to $8.25 and $6.50? last season - that price increase is a very clear and logical reason why "some" farm values have increased since the "NO Market" period.
A market is a market which is a market - willing buyer willing seller - there are plenty of offshore buyers looking for a way into quality NZ farm land as a longterm investment - I had one offer to buy last week - cashed up and ready to go!!!
FARMING IS A PASSION AND A LIFESTYLE SECOND TO ONLY TO FISHING
A mate down south said he was considering selling up his Fonterra shares and supplying OCC. Then he heard from one of his OCC supplying mates, that they hadn't been paid since May and in Sept were only going to get paid for Augusts milk as OCC had 'overpaid' them in May. OCC now pays up in full every three months which was a carrot for some, but then to be told that the company had 'overpaid them and weren't paying them anyhting has a few suppliers a little upset. My mate now reckons staying with Fonterra is a better bet as so far, they haven't clawed any 'overpayments' back. Would be interested to know if OCC have done the same up North as they pay North island differently (usually more) than what they do south island suppliers.
Back in the old days I reckon we were pretty good bankers. The problems arrived in the late 90's - 2007 when bankers got dum and became prostitutes and were paid on the amount of money they leant. Most experienced bankers left the game as ethically they struggled with the new game.
Call it asset lend or whatever....
We have what we have cause they starting making loans without consideration of how the the lent amount is/was/will be repaid.....
And now ppl are sawing, well how did you expect to have the thing repaid.
Bankers follow usual corp practice & are on rotation, so after 2 or 3 years the account is someones elses problem......
Bless...
Has the RBNZ the ticker to have the banks mark mortgages mkt to mkt, and take up provisions for loans higher than valuation....
How many accounts? 1,000, 2,000 or 3,000?
It would make life better for the rest of us on and off the land...
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