Pita Alexander tells dairy farmers to 'make financial hay' before milk prices fall; sheep farmers turn to shine is coming

Pita Alexander tells dairy farmers to 'make financial hay' before milk prices fall; sheep farmers turn to shine is coming
Scarcity will raise prices

By Pita Alexander*

It struck me the other day that within five years it's more than likely that Australia and New Zealand will be able to sell more lambs than they will have available.

It's no secret that our lamb flock has been on the wane and we are another couple of million down from last summer's drought.

The law of supply and demand would indicate that better prices will result.

Scarcity is a marketing tool of a type, but it is not the whole answer.

The perfect scenario would be a growing lamb base and a growing lamb market, but the world thirst for milk has put pressure on sheep country suitable for dairying.

It's a safe bet that the United States and Europe will ramp up their dairy production at the present high payouts. It won't happen overnight but it will happen and it has happened before.

That can only lift world supplies and we know what happens next.

I would guess that within three years Fonterra will be forced into a lower milk solids payout. Farm working expenses at the farm gate keep rising at 5 to 6 per cent a year and term loan and current account interest rates will be around 2 per cent higher than now.

That means farmers need to make financial hay as hard as they can go over this period - don't fight this issue, plan for it.

Another thought worth chewing over is that European dairy farmers will soon be able to maximise their milk production. Previously they were on a quota and producing above the quota was quite unprofitable, but this may no longer be the case in 2015.

The key in Europe, Britain and the US when increasing their production tends to be feed costs. Dry years mean feed costs increase and New Zealand grass is more efficient. The price of corn and corn residue in the US has an enormous effect.

Some more musings from a farm accountant who has gone the country mile:

- The various articles in the media about the New Zealand meat industry of recent months remind me of very similar articles some 30 odd years ago. Australia has lost control of its meat co-ops - almost all are now United States or South American owned.

- With a focus on managing costs where does the pressure need to be: wages, interest, irrigation costs, fertiliser, stock food and repairs and maintenance. Income taxes are not often in the top five to six of key costs.

- Sheep and cattle farming have a low-term debt, but low profitability - dairy farmers have a high-term debt but high profitability. Debt reduction is always healthy, is good risk management and feels good, but it is not income tax deductible and is not always the best use of hard-earned cash. Usually it pays to be an autumn spender because you know exactly where you are in cash terms.

- Educate those children well. If it hadn't been for my mother I would have left school at 15 years of age - but mother was always right. A good start is English, science, maths, engineering and people skills.

- Rural term debt is currently around $52 billion, government term debt around $58 billion and corporate term debt around $79 billion with residential term debt around $185 billion. An increase of, say, 2 per cent in interest rates across the board here (which would still be no more than interest rates that existed 5 to 6 years ago) would increase the overall interest costs annually for the groups referred to above of around $7.4 billion. The Government may be able to contain its increase more than the others.

- NZ Government term debt at $58 billion is relatively well controlled, but non Government debt at $316 billion, much of which is borrowed offshore, is much more vulnerable if, for example, the NZ currency relative to other key currencies was to weaken significantly.

- Lastly, I have learnt that you must never argue with an idiot - they drag you down to their level and then they beat you with their experience.

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Pita Alexander is a specialist farm accountant at Alexanders. This is the first of his fortnightly columns which are first published in The Press. It is here with permission.

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6 Comments

Well done for interest taking the time to dispaly comment from one whose message is not bathed in wishes of ever more; use of cedit, property sales or policy promotion.
 
An example of ramping up dairy and export capacity to Asia:
Thoughts from Dairy Australia
http://www.abc.net.au/radionational/programs/saturdayextra/dairy-takeove...
Its hard to overstate the size of the opportunity [Asia] [for Australia]
A lot of Europeans wish to increase production
The Americans have discovered exporting
 
http://www.wcbf.com.au/
http://www.asx.com.au/asx/research/companyInfo.do?by=asxCode&allinfo=&as...
 

ROD ORAM in the press
OPINION: Synlait represents the best and worst about the dairy industry. On one hand it is admirably ambitious. On the other, it has been far too dependent on debt.
http://www.stuff.co.nz/business/farming/opinion/9327260/Dance-of-dairy-debt
 
Remember the ANZ thoughts on irrigated dairy
http://www.anz.co.nz/commercial-institutional/economic-markets-research/...

FEATURE ARTICLE: INVESTIGATING THE RETURNS FROM IRRIGATION

Huge attention needs to be paid to deriving cash value from water storage and

new irrigation projects.

 

 

http://www.linz.govt.nz/overseas-investment/selling-assets
http://www.legislation.govt.nz/act/public/2005/0082/latest/DLM358028.htm...
The factors are the following:

  • (a) whether the overseas investment will, or is likely to, result in—
    • (i) the creation of new job opportunities in New Zealand or the retention of existing jobs in New Zealand that would or might otherwise be lost; or
    • (ii) the introduction into New Zealand of new technology or business skills; or
    • (iii) increased export receipts for New Zealand exporters; or
    • (iv) added market competition, greater efficiency or productivity, or enhanced domestic services, in New Zealand; or
    • (v) the introduction into New Zealand of additional investment for development purposes; or
    • (vi) increased processing in New Zealand of New Zealand's primary products:

 
If as Rod mentions that debt were the only issue with Synlait Farms, (and awarded management and operations are all state of the art), how does the overseas investment find a way through the Act.
Seems Ok that foreign investors/developers can buy properties with high, or higher than current loan approvals ratios avaliable to local borrowers (or is everyone geared like this).
 
Historically you'd hear of folk buy the neighbour, gear up and (pin your ears back) increase production by 30 to 50% over 5 years. - however :( with nitrate leaching and production changes nowish needing development approval it doesn't look so straight forward.
 
howsoever http://www.cpwl.co.nz/scheme-development
CPWL was given the opportunity to propose a revised run-of-river scheme, which was consented in 2010. This allows for run-of-river takes totaling 65cumecs, made up of 25cumecs from the Waimakariri River and 40 cumecs from the Rakaia River, including 6 Synlait band 2, 3 cumecs of subservient water.
In 2012 CPWL received a $5 million loan from the Selwyn District Council.  This was supported in early 2013 by $ 5.7 million of funding from the Ministry for Primary Industries  Irrigation Acceleration Fund (IAF) and allowed for detailed design work to begin on Stage I of the scheme.
maybe of interest.
 

What can I say.
What does subordinated mean?.  
When did LIC become a surety so they could maybe come a cropper?.
This wheeler Co-operative dealing behind the scenes is becoming all too apparent.
But why involve the Cayman Islands?.
Is Nigeria also coming to the party, besides China?. 
Is this another Kiwi fruit cake fiasco?.
Is the cheque in the post?.
Is a sale in the offing.?
Or a Government bail-in.?
http://www.stuff.co.nz/business/farming/agribusiness/9327410/Chinese-companys-LIC-loan-repayment-doubts
Answers please.
By 2014, will do.

Great article...  ( just want to clarify the $7.4 billion in interest )
$370 billion at 4% = $14.8 billion a yr interest
$370              at 5% = $ 18.8 billion  a yr
$370                at 6% =$22.6 billion a yr       
 
2% jump in interest rates could cost an EXTRA  $7.4 billion.
If Nominal GDP is about $200 billion a 2% jump in interest rates is about  3.5% of nominal GDP...        
I think we are sqeezing out 3%  Nominal GDP growth at the moment......  so you can see why the Reserve banks says that the "Neutral" interest rate has lowered....   A 2% rise in interest rates might dip us back into recession... (unless we borrow more and spend.)
With farm gate costs rising at 5% / yr....     Buying a farm at  todays prices ... with debt ..seems to be a risky thing to do...
 

  A 2% rise in interest rates might dip us back into recession... (unless we borrow more and spend.)
 
Some are borrowing early based on incessantly repeated forecasts for firmer economic growth that in reality fails to get recorded.
 
Kiwis are going back to topping up their mortgages to fund spending.
 
Mortgage brokers say boosted equity from rising house prices, plus low interest rates and better job security, have enticed homeowners into extra borrowing.
 
The trend is strongest in Canterbury as people fund their own home improvements on the back of earthquake-related repairs. Read more

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