ANZ economists see 'some casualties' from a likely correction in dairy farm prices this spring

ANZ economists see 'some casualties' from a likely correction in dairy farm prices this spring

It's no longer a question of whether dairy farm prices fall, but how far the fall might be, economists at ANZ say.

In their latest Agri Focus report ANZ economists Cameron Bagrie, Con Williams and Mark Smith say there's a high likelihood a correction is in the wind this spring for dairy-aligned property, with the 10% to 20% increase in prices over the past couple of years likely to "quickly come out of the market."

"The question in the rural property market is no longer whether dairy-aligned land values will fall, but rather how large the fall might be," the ANZ economists say.

ANZ is the country's biggest rural lender having disclosed in June $11.3 billion of dairy exposure, down from $13.1 billion in 2010.

"There's a high likelihood a correction is in the wind this spring for dairy-aligned property. Total property turnover remains not too far off the long-term average and the price per hectare has pushed through the $30,000 mark for the first time ever. However, recent anecdotal reports are highlighting that large scale dairying operations are struggling to attract buyers, while second tier or distressed properties are receiving discounted offers. Smaller grazing and finishing blocks still appear to be attracting good buyer interest and prices though," Bagrie, Williams and Smith say.

Earlier this month Fonterra cut its farmgate milk price forecast for the current season by $1.40 to $3.85 per kilogram of milksolids, and is offering farmers interest free loans to help them through the tough times. Dairy NZ estimates the average farmer needs a milk price of $5.40 to breakeven.

Fonterra's lowered milk price forecast comes with prices having fallen in its last 10 consecutive GlobalDairyTrade auctions with the milk powder price down 32% in the last three auctions. 

"The extent of financial pressure that is now going to be placed upon the sector over at least the next two years from back-to-back low farmgate milk prices means there are going to be some casualties and a correction in land values," the ANZ economists say.

"The real test is likely to come this spring given continued downward pressure on international milk prices and forecast estimates for farmgate prices in 2015/16. Most farmers are expected to hunker down and focus on their existing businesses rather than expand in a period that is going to stretch even the best businesses in the industry."

They go on to say the 10% to 20% price increase over the past couple of years is likely to "quickly" come out of the market.

"We wouldn't rule out something larger but are mindful of key legs of support," the ANZ economists add.

These include historically low interest rates, a bigger pool of buyers than pre-2008 including foreign investors and domestic equity investors from outside the sector, productivity and cost efficiency improvements, low inflationary pressure, and the "shock absorbers" of  falling interest rates and a weakening NZ dollar.

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So now, its the producers that borrow to keep producing, because the consumers have stopped borrowing in order to consume.
Dairy farmers, coal miners, iron ore, aluminium, oil (up to and including Saudi Arabia), car brands via ultra low finance offers and huge govt subsidies, etc etc. Name your commodity.
So the banks clip the ticket both ways until......its gone!!
Both bizarre and doomed!

"So now, its the producers that borrow to keep producing, because the consumers have stopped borrowing in order to consume."

Same reason why the Government had to borrow billions - because the consumers stopped consuming.

I wonder when the debt triangle, ponzi scheme will fail?

It will fail when the governments runs out of bullets

Time for an economy without banks or one that severely limits how much debt they can sell. How much different are they than drug dealers? Do we know how many farmers have topped themselves this year?

Yet we have ppl complaining about their rights to take on debt to buy the home/farm of their dreams...these are voters and no Pollie wants to lose votes.

Clearly we need permanent regulation like an LVR of 80% max but really no one wants to look to that and happens when debt stops growing, too many ppl have a vested interest in pumping the bubble, pity.

"topped themselves" this hasnt started yet, wait to see how we are in year 3+

hit the nail on the head.

throw in tax on each consumer-producer-consumer step and voila why modern system is failing.
previously there were significant non-bank and non-tax able capital and trades, no longer there to support the system.

From what I have seen in recent years the ANZ will show no mercy to farmers they want to get off the books. Loyalty counts for nothing.

Talking of falling prices - I cannot believe the Herald has printed nothing about the latest REINZ figures which showed a decrease in median Auckland property prices for July.

Mainstream media is so rigged.

Cheerleaders for profit (ergo the status quo).

Agree with your sentiments Triple, but I think they did report (the massive Auckland Central drop didn't rate a mention of course);

I actually think they've gone from full cheerleader to somewhere close to neutral. Fran O'Sullivan has written a few good articles on the foreign buyer and dairy situation recently.

I missed that article - my mistake.
One thing I can say though is that I bet this article wouldn't have been front page like the one a week or so ago talking about house prices rising. It appears when prices rise, there's typically a big write up and when they fall, there's a much smaller one (if any).

I'd be surprised if farm prices fall very much. I think this National Gov't will do everything in its power to keep farm prices high, even if it means selling every farm to overseas buyers. With the lower NZ dollar they are cheaper now.

Land prices will fall to a level to reflect the return on purcahse price you will be currently getting from Fonterra. Banks are not going to just give prospective buyers an open cheque book to pay whatever they want to to buy farms. Any farmer with half a brain will want a return on his equity and borrowings so that has to mean paying less currently. The National Government is powerless in this situation as like Solid Energy. This is too big and would cost the government billions it does not have.

a lot of farmers and their families are in it for the lifestyle - they don't want to live in town, sit in offices, answer to bosses.

As long as there's foreign money waiting in the wings to grab land - dairy land is flat and usable for many things - unlike cattle/deer/beef, and is unlikely to stir the councils or population like housing of market garden buy ups - then those prices will never come down to the NZ economy value.

but why do you think foreign money wants to invest in NZ or acquire NZ land?
It's not any bargain to buy land in NZ anymore. There are countries in Europe with cheaper land and Chinese are showing no interest.

If there is not enough demand, why to keep over investing?

When you say don't want to answer to the boss, you ignore the ever increasing compliance burden put on farmers? Or the fact despite how they might value the assets they sit on and the work they put in, Fonterra have just now told them just how much that is all worth.
I have varying degrees of sympathy for the dairy crowd out there. Most of my sympathy is for the low cost set ups who have been swept away in the recent glut from the Johnny come latelys who gambled on high input cost high output setups. Regardless, I hope the worst affected have the support to get through this.

I'm not ignoring it, I just consider that a new thing - and unethical.

Farm prices haven't dropped, and not everyone worships the citymans dollar. Many of the farm folk prefer fresh air, nature, and not living in their neighbours pocket - sadly the system is developed to dehumanise the drones and suck all their labour and life away for profit of the bureaucrat and the banker. for some reason many of us would just like to get as far away from that as possible, while living in our own NZ.

Land prices will fall to a level to reflect the return on purcahse price you will be currently getting from Fonterra. Banks are not going to just give prospective buyers an open cheque book to pay whatever they want to to buy farms. Any farmer with half a brain will want a return on his equity and borrowings so that has to mean paying less currently. The National Government is powerless in this situation as like Solid Energy. This is too big and would cost the government billions it does not have.

Gordon - land prices wont fall to a level to reflect the return on purchase price you will currently be getting from Fonterra - there is no return this season (which would mean farmers will give their farms away) however there are other land uses and an intelligent investor will be look at rolling averages and so forth.

Because its raining today are you running out to build an ARK???

Tell that to people who want to buy a farm no matter what. Remember most farmers did not finish school.

Define 'finish school' Gordon. There is a legal minimum leaving age in NZ and I don't personally know any farmer (and I know quite a few) who left before the legal leaving age. Any one who leaves at the legal leaving age has 'finished school'.

They went to school to eat their lunch and went on the family farm when they were 15.

A bit of the green eyed monster coming through there Gordon. I take it you were only to happy to have your livelihood given to you by these farmers that went to school to eat their lunch and went on the family farm when they were 15.

Certainly not envious as it is always more satisfying to create one owns fortune as I did. It was just so noticeable that their parents had low expectations and the boys certainly fulfilled their parents expectations. My parents expected us all to go to university and we did. Dairy farming is probably changing forever and farming families are going to have to diversify. That's if they have the skills to do so.

Certainly not envious as it is always more satisfying to create one owns fortune as I did. It was just so noticeable that their parents had low expectations and the boys certainly fulfilled their parents expectations. My parents expected us all to go to university and we did. Dairy farming is probably changing forever and farming families are going to have to diversify. That's if they have the skills to do so.

A month or so ago I felt some sympathy towards your woes about your significant retail investment located in a provincial area dependent on your rural farming community

From what you have revealed you are located in a provincial area somewhere south of Rotorua and north of Wellington

I hope for your sake and your investment that Gordon is a nickname and and not your customary firstname. Sometimes you have to learn not to leave timebombs laying around, someone will recognise you. It only takes one, and then the grapevine takes over

Thanks for the advice. At least I am honest unlike many on my his site. Farmers are their own worst enemies often. They have driven up prices of land trying to beat each other to neighbouring land and they were generally borrowing the lot. It didn't stack up then and is worse now. Was that a smart thing to do? Some spoke as if it was a competition to own the most farms.

And others went on to start business empires, do trades, and enter the arts.

The system as it stands does not serve those people well Gordon.
That it worked for you that's great - but that's something I often see - sure it worked for you and you think you did it on your own; but a lot of your success is that the environment suited how you were born and raised, through no cause of your own.
Yes, you worked hard and made sacrifices and done the necessary steps and we no way begrudge you that. But for many others they're fish trying to climb trees, because the system just doesn't accept the way they're wired.

Andy, why do you rush in at the start of the price correction, why not walk down the hill..... if you where a China corporation you would want to buy the big guys who already have multiple farm/s and mangers onsite, then replace these with your own later and buy local processor, just like the beef farms around Townsville in Aussie.

The little dairy guys may face the worst pressure, no buyers. While the ANZ book may well "only" be 11bil the total NZ bank diary book is closer to 35-40 billion, good article on herald 2400 farmers hold less the 25% equity. Another 20-25% hold around 40% equity. I can see the OCR going well lower then even the current economist forecasts.

The rock star economy is in rehab

Get over it the banks own everything where there is debt/credit attached or secured.

The real question should be how far will the Auckland Property Market fall when the effects of a Dairy Downturn flow into the big city.

Wait about 18 months out, be some bargain Corramandal bachs for sale....

A LOT lower ocr is going to save many peoples bacon in AKL, kicking the can another 5 years down the road

There is always casualties when your dealing with banks , but they created this

No individuals have bought farms and paid too much for them. Hoping for capital gains as in Auckland housing market. Paid too much for cows also. Farmers generally not the sharpest knives in the drawer and that is why they are farmers.

What an outlandish claim - some of the smartest people I know are farmers.

There are exceptions to every rule. Th ones I went to school with and meet could only be farmers. Anyone with brains would get quickly bored when milking.

How old are you Gordon

So, apparently it hasn't occurred to you that intelligent people can think about other things while doing something repetitive. Revealed something about your own limitations there.


Gordon be thinkin' back to a toime when all varmers could talk about was their comboine arvesters and all, ooh ah

Aye, an' it do quicken the urgins o' man and maid when the sukebind do wax with the moon.

The two people I learnt most about money and business, one a farmer, the other a commercial fisherman. They both had skin in the game. Corporate finance types I've come across since, not so much.

marcf28 - you're one that can't think for yourself as well ?

Haha yeah and most of the rural bankers hung out with the farmers at Massey and Lincoln , it all makes sense now

They were all imbibing the same magical thinking.

It wasn't finance, farming or farm management but something known as agribusiness.

Perhaps to reinforce its lower production outlook, Fonterra reduced the volumes of product it will offer at the GDT in the next few months. This is little more than a weak breeze on a sultry August day. Global milk powder inventories continue to rise. In the U.S., manufacturers’ stocks of NDM reached an alltime
high of 262.3 million pounds at the end of June. In Europe, manufacturers are selling milk powder to the government rather than to end users. Cooperatives in New Zealand reportedly failed
to empty their warehouses before the advent of the new season. Stocks continued to build even as merchants managed to step up sales to nearly every buyer outside of China. What will happen
now that those customers have been satisfied?
As for China, its milk powder demand once seemed worthy of Ecclesiastes. “All streams flow into the sea, yet the sea is never full.” But the market was misled. China was not suddenly devouring staggering volumes of milk powder. It consumed some and stored the rest, much of which is still warehoused. Those hoping that Chinese demand will resurge and rescue the milk powder market are “chasing after the wind.” This week China allowed its currency to fall against the U.S. dollar. Coming as it did on the heels of the stock market collapse, this move highlights concerns about the health of the Chinese economy. The weaker yuan makes imported milk powder more expensive and so this new policy could weigh on demand for dairy products even if China does manage to export its way to greater prosperity.
Last week’s Dairy Products Report held no surprises. U.S. butter production totaled 142.8 million pounds in June, up 1.7% from the year before. California butter production fell 8.2% from last June, but output in other western states was strong. At 959 million pounds U.S. cheese output was 1.5% greater than last year.
Cheddar production rose 4.3%, which suggests that there will be plenty of cheese available at the spot market in coming months. Combined production of NDM and SMP totaled 199 million
pounds, 1.3% lower than last June due to a drop in SMP output.

" ... Fonterra reduced the volumes of product it will offer at the GDT in the next few months."

Big balls that, betting on the market from such a position of weakness !! They might have to build even bigger storage sheds !

I thought the first rule in business was to get the cash in !

Unless they have obtained a new contract for that milk.

‘What’s scary here is that people are beginning to doubt the sophistication of the Chinese officials…Whether they are adept enough and clever enough to know where to move; they didn't look very adept when they were trying to save their stock market, and they're in an area where it can be a little dangerous…”

As they say, “bull markets create genius.” Let me suggest that Bubbles deserve Credit for propagating “genius” – genius in the markets, throughout the real economy and in policymaking. I recall how the brilliant, omniscient and clairvoyant “Maestro” Alan Greenspan was unconditionally revered during the late-nineties Bubble period.
For starters, never have so many Chinese owned (over-priced and poorly constructed) apartments. Never have Chinese citizens, governments, financial institutions and corporations accumulated so much debt. Never have the Chinese had so much invested in securities markets. China has zero experience with a multi-trillion (yuan or dollars) “shadow banking system.” Never have so many invested so much in “wealth management” vehicles and other sophisticated financial products, without a clue as to where their “money” was directed. And when it comes to corruption, I seriously doubt history offers a like comparison.

The Chinese – apartment owners, bankers, Internet financiers and policymakers – have never experienced the downside of a massive Credit Bubble. Never has China experienced Trillions of “money” that retains “moneyness” chiefly on the perception that the all-knowing central government will safeguard its value. Never have Chinese finance and spending had such major impacts around the world. China does, however, have a long history of financial panics.

Thanks for the link Andrew, the more you discover about China and it's multi decade rise the scarier it all looks. David Stockman (sorry David Chaston more from the "even worse" D.S.) has some pretty choice words to describe the Great China Ponzi:

"China is not a clone-in-the-making of America’s $18 trillion consume till you drop economy—-even if that model were stable and sustainable, which it is not. China is actually sui generis—–a historical freak accident that has no destination other than a crash landing.

It’s leaders are neither wise nor deft economic managers. In fact, they are a bunch of communist party political hacks who have an iron grip on state power because China is a crude dictatorship. But their grasp of the fundamentals of economic law and sound finance can not even be described as negligible; it’s non-existent."
In short, China’s freakish economy is just one great collection of impossibilities that cannot be stabilized or propped-up much longer. But in their desperation to forestall the inevitable crash, the suzerains of red capitalism will increasingly turn to the mailed fist of state repression.
Indeed, they can’t any longer rely on the proposition that party power comes from the end of Mr. Deng’s printing press. To pile on even more mountains of credit will only exacerbate the massive capital flight that is already underway and which threatens a devastating further plunge of the RMB exchange rate.

The latter is the Achilles Heel of the whole Ponzi. To arrest capital flight Beijing will have to do the opposite of what it has done for the last 20 years. That is, it will have to shrink the domestic money supply and banking system in order to sell dollars and euros rather expand domestic credit in order to sequester dollar liabilities (i.e. treasury bonds) at the PBOC.

In due course, China will be aflame with campaigns against corruption and “enemies of the state” as it seeks to cope with its collapsing financial bubbles and endless herds of economic white elephants. Chairman Mao’s axiom as to where state power really comes from——that is, the barrel of a gun—-will become the increasingly evident modus operandi of the communist party rulers. The resulting deflationary spiral will suck the global economy into its vortex. And Wall Street will go down for the count because this time the Fed will be utterly powerless to reverse the tide."

someone on interest put an analogy on here that i liked recently which likened the world economy to a motor that was running out of oil... and the remedy was to hit full throttle. Borrow and spend till she blows.

Individually they're very bright and loyal people.
Collectively, the system is locked in place and operates on a totally different rule book - no one person knows what or how the system runs nor is in position to see enough of the picture to change things.
I'm amazed they hold it together in a country and population that size.

That's my take on it. It is sort of a Mandarin economy where the best and brightest rise through the Party ranks to high office as government administrators. Sometimes I worry that our reliance on the wisdom of the Mandarins running the RBNZ and Treasury has eerie similarities.

We also see it in the Tertiary education sector.

We also see it importing US citizens or people who acclimitised to that culture.
And with refugees and highly skilled immigrants, who come from countries where questioning the system and the bosses isn't acceptable.

Used to be Kiwi got easy placement overseas because they were hands-on problem solvers, happy to pickup a shovel or change a lightbulb at a moments notice. That attitude is dying with our old culture, and the introduction of "group-think" into our schools.

It's just a evolution of groups thing, as more people with certain attitudes drift into places of influence and power, their personal values affect the group behaviour. Sad really - I just don't like it when questioning or examining those values becomes a sin, it puts up back a thousand years when the Catholic Church determined right or wrong.

(Irrelevant comment deleted, Ed. See our commenting policy here -

That video is f#%ken sick!
I'd like to see the operators fed to the tigers.

I know someone who said they were talking to someone who was high up in the ANZ. What he said was that these interest free loans fonterra were making to farmers were being made without consultation with the banks. Therefore alot of this money could end up in the banks hands when the farmers are sold up or be used to pay some bills before they are sold up.

Not much attention has been paid to the 'interest free" Fonterra loans. They seem a very odd move to me, and might have some highly unexpected consequences. I would like to hear some more discussion.

Fine print for the loans hasn't been released yet, KH. So things like security over the loans aren't known yet.

What we do know:
It will be paid out drip-feed fashion on this seasons production as long as that production is backed by shares/vouchers. First payment will be in October at an indicative price of $0.12 for milk from 1 June - 30 September. It will be reviewed in December by the Board so if I was a farmer contemplating it, I wouldn't be getting too excited yet about it all until the fine print comes out.

For shareholders, they have right to access their current account with the company. Provided the board of Directors ok their credit level.

I would expect that IRD will make farmers pay income tax on a set amount of "technical interest". As Fonterra has to borrow the money WITH interest, so lending it to farmers means the unclaimed interest is technically income (compensation).

We have been told that the application form form will include information on things such as tax and any security for the loan. The devil will be in the fine print - so let's not get too excited about it all just yet. ;-)

Can the ANZ expert please point out the large scale dairy farms that are struggling to sell please because I have not seen any advertised at all in the last 12 months if you look at all rural land ads there are none and why is ANZ talking the market down it doesn't make sense?????

many dairy farms don't need to advertise to sell.
if there's a hint someone is selling news gets around fast.
That and rural agents tend to work for their money, finding farms, setting lines of dominoes up for the various clients.

thanks cowboy but it still doesn't make sense if you are selling wouldn't you want as many people to know about it like advertising it, sorry I just think ANZ are jumping the gun with there comments I know milk price is hurting farmers bad AT THE Moment hopefully it will start to lift soon, The Dairy farmer and family and staff are some of the hardest working people I have ever seen we all need to show some support and stop Knocking these people and let them get on with there job.

if you dont advertise you dont need to pay commission. more often than not NZ farmers would rather sell to a neighbour or up and coming.

The sad part is if there is a raw milk market left by the time the dust settles.
I seriously doubt foreign "dump dung in the streets*" foreign farmers are going to sit by and let the subsidises vanish - their feed costs and maintenance is far to high to do that.

(* can you imagine the city folk handling that in NZ? they complain if a cow poos in a creek - can you imagine what would happen if a front loader full was dropped in their city where their nice clean cars and shoes are!!)

We have agents cold call us not infrequently to see if we want to sell any of our land - farm or runoff and they also cold call us asking if we want to buy - if there is land that they deem we should be interested in. Its be going on for close to 15years now.

I thought you were a farmer CO. Surely you can work out that agents just want you to help them make another commission. They are not calling you to help you. You are their source of income and they do not care a dam about you. Driving around the Manawatu yesterday I did not a number of farms on the market. I imagine that land prices will drop now as people will not be able to get finance unless they do.

Some criticism of farmers cleverness here because they have paid top dollar for dairy farms over the last couple of years. Using the same thought processes that doesn't make us Aucklanders / seem too sharp either. Lets face it - all Kiwis so dumb lah - you have to be able to sleep at night!

Carrying high debt carries real risks not reflected in modern interest rates.

As Fonterra cuts supply by 10% to dairy auctions. This is a start and may start to stabilize prices from falling further. However if Fonterra was to cut by 50% supply to dairy trade auctions this will have more effect and prices should go up. If little is done supply will still be too much and The break even price is probably 18 months away and and $6 Kg that Farmers need to pay back cash to Fonterra for loans is probably 3 years away. Other countries need to cut their supply also to make any money.

Cutting supply won't increase demand! It may shift the price temporarily, but as the glut builds up ( supply held back and warehoused) who is going to tell the farmers, wherever they are, that the debt they have employed to build capacity is going to have to be serviced on half the production they had planned for? Fonterra? The UK Dairy Board? The Canadian Dairy Export Association? Once capacity has been built into a system, it isn't controlling supply that determines if it is productive use of capital, it is demand ( that is falling in the No 1 importer - for everyone!). Only permanent removal of capacity will resolve the equation, and that involves debt default and players in the market going broke and leaving the industry permanently. Not just in New Zealand, but elsewhere as well.

Just bought a kilo of cheese for <$7.

Will Fonterra be storing it in milk lakes aka the EU of years past I wonder? or dumping it? got to wonder on the unfair competition laws we have...or um do we have any? LOL, probably not as they are "not needed".

The real problem with dairy is too high a price paid for land and loaded with debt/credit.