KPMG partner sees glass half full when looking at agri industry; says sector is diverse enough to weather the dairy downturn despite dairy making up 67% of agri lending

KPMG partner sees glass half full when looking at agri industry; says sector is diverse enough to weather the dairy downturn despite dairy making up 67% of agri lending

By Jenée Tibshraeny

Those in “the media” are being accused of painting an “incredibly black picture” of the New Zealand economy by using plummeting dairy prices as a measure of our agricultural sector as a whole.  

KPMG’s global head of agriculture based in New Zealand, Ian Proudfoot, says “The media have adopted the dairy industry, or more specifically, the GlobalDairyTrade (GDT) auction results, as their proxy for the success or otherwise of the New Zealand primacy sector.

“The last year has seen journalists increasingly hone in on the bi-weekly price movements of the limited range of dairy commodity products sold through the GDT platform (often in declining quantities) as a key bellwether for the economic wellbeing of farmers and the wider New Zealand economy.”

Proudfoot makes these comments in KPMG’s Financial Institutions Performance Survey Review of 2015' (FIPS), released today.

A clue as to why dairy prices are under the media’s microscope  

Yet the figures detailed in a different section of the report tell a different story, perhaps providing some explanation to the media’s supposed fixation on dairy price movements.

KPMG recognises growth in agricultural lending outpaced growth in lending to all other sectors by the end of 2015, “with a lot of this growth coming from dairy”.

Dairy loans made up 67% of agricultural lending by banks, at $37.86 billion.

KPMG admits only a small portion of the growth in agri lending related to new dairy lending, with the majority being working capital loans to existing customers.

It says banks are keeping a close eye on their exposures, as dairy payouts remain below breakeven point, and the RBNZ and DairyNZ estimate 80% of dairy farmers will have negative cash flows in the 2015/16 dairy season.

“With the recent cut in Fonterra’s payout for the 2015/16 season to just $4.15 per kg/MS, the dairy sector will continue to be under extreme pressure,” the FIPS report says.

KPMG goes further to say, “In June 2015 the country’s biggest dairy lender, ANZ, reported having reduced its dairy exposures by approximately 16% or $11.3 billion since 2010, having estimated that 5% of its dairy book would be stressed in the upcoming 12 months.

“In November the RBNZ reported that although non-performing dairy loans were still low at 1%, up from 0.6% the previous year, the watchlist loans increased to 5.8% and were considered a leading indicator of non-performing loans.”

NZ’s agri sector diverse enough to weather the dairy storm

It is against this landscape that Proudfoot argues New Zealand’s agricultural sector is diverse enough for dairy’s storm clouds not to cast a shadow over the entire sector.

He admits dairy farmers are facing strong headwinds, but says there’s optimism in the primary sector if you look beyond this.

Kiwifruit has recovered quickly from the Psa disease, beef farmers are enjoying high prices held up by solid demand, and the value of wine exports is at a record high. There are also positive growth stories in the honey, pip fruit and fishing sectors.

“The beauty of New Zealand’s primary sector is its diversity… yet the wider community has been conditioned to largely measure the sector’s contribution to the economy on the basis of a single metric, dairy prices,” Proudfoot says.

He goes further with his “glass half full” approach, saying cheaper milk could see the dairy sector broaden its customer base, as more people would be able to afford to buy it.

However he admits there’s a limit to this theory, and a price rebound could force the dairy sector to have to “earn its loyalty”.

Dairy farmers may be strapped for cash, but now’s the time to innovate

Proudfoot says the industry needs to get to know its consumers, so it can deliver products that fit with their lifestyles.

“This requires the industry to think carefully about the products it supplies the market and invest, not only in the stainless steel needed to process the milk, but the branding, innovation and consumer experiences that differentiate our products and secure a premium,” he says.

“To me, the key development over the last year has not been the shifts in dairy pricing, but the clear emergence of some really disruptive thinking and technology into agriculture across the world, and the dairy sector is not immune from this disruption.”

For example, he cites an investment Coca-Cola has made in the dairy company, Fairlife; Coke expressing its interest in growing its business by focusing on health and nutrition.

“While many of these alternative products remain some years away from commercialisation, we cannot ignore the disruption that is coming to the global agri-food system or underestimate the pace at which the change is going to be adopted,” Proudfoot says.

'The food, fibre & timber equivalents of a Louis Vuitton handbag or an Apple iPhone'

Proudfoot maintains New Zealand needs to focus on innovation to bring high-end products to the market – even during a time dairy farmers are struggling to keep their heads above water.  

“Our products need to stand out in a crowded marketplace to command a premium. Our products need to be the food, fibre and timber equivalents of a Louis Vuitton handbag or an Apple iPhone,” he says.

“Despite the headwinds, now is the time to boldly invest in the innovation that will differentiate our products in the minds of consumers and preserve the premiums we have enjoyed in the past. There is no other choice but to invest in the future.”

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Dairy farmers may be strapped for cash, but now’s the time to innovate

Who or what will be underwriting the drive to innovation with many existing entry barriers in place? Obviously not the debt ridden.

Touche Stephen.
And I would remind KPMG's Proudfoot that the wheel has already been invented.

Comes back to over production , Mid West production increase this season %12.2, then there is Europe. The USA has 10 million cows we have 6 million, the USA production per head is double ours.

To put this into context, European milk volumes have increased by 2.7 bill litres in the last year contrasted with NZ total production of 2.1 bill litres.

We are all going to try and 'innovate' at the same time.


That's a very intersting factoid. Sadly milk is so healthy it actually requires zero innovation to turn it into a health product, you can only make it less natural, and less healthy. Like adding chocolate and sugar to it, which is what the much heralded fairlife is doing.

best fresh

If we went entirely grass fed and organic, that would truly and substantively, be "innovative". The forces (Monsanto etc) against "organic" worldwide, are dominant for now, meaning that if we could pull an "organic New Zealand" off, we would have a price/market advantage for years to come.

Organic NZ would be reinventing the wheel, (but in a good way).

You can be entirely grass fed and not organic. ;-) I doubt we could seriously compete with the Europeans etc on the price of organic milk/milk products as many of their farmers have a traditional organic model of farming. It takes 3years to achieve organic certification in NZ so the world would have 3years notice of our intention to go that way. A greater point of difference would be grass fed and cows outside. But that's not innovative. ;-)

Interesting the price difference on the Countdown website for organics. Fonterra organic is cheapest at $2.90/l. Lewis Rd and Puhoi is up to $4.79/l. Are we going to see a price war?

There is actually questions on it being healthy. One for instance is suggesting it might leech calcium from bones and not add it. Then there is A1 v A2 argument. then there is the fat argument ie its bad for your heart.


The glass ain't half full of "debt" though is it? It close to brimming!


This is THE MOST SEVERE DOWNTURN in the history of NZ dairy, and what? Nobody is supposed to talk about it?
Come on now, we all love our daily dose of schadenfreud in the morning.
I love this little gem, "there is no other choice but to invest in the future" well of course thats not true at all, we have many other choices. Or how about the biggest news is not the collapse in prices which has driven the increase dairy lending, financed by reverse equity, the biggest news is something about Coca Cola spending some chump change to buy out a startup company. Which sells of all things, ultra processed milk, when unprocessed milk has the most health benefits of all.
It's as if the big problem was one of marketing, not lack of demand growth. All of this from an accountancy firm, if you can believe it. I have a lot of time for accountants, but they are not exactly renowned for their creative thinking. Clearly they are freaking out, and attempting to exert some influence over the situation.

If I recall correctly these guys are auditors (internal & external)for number of the banks and provide financial reviews for the industry, in my world that is perceived as conflicted commentary.

This is THE MOST SEVERE DOWNTURN in the history of NZ dairy

As a dairy farmer of 35+ years I would challenge that statement. e.g. Cow prices haven't halved yet - like they did in 1985/86.

I was thinking the same CO....1980's was a horrendous period in NZ farming and it continued way past 1990... and this downturn has nothing on it. 1 Oct 1986 GST was introduced......1 Oct 1986....livestock taxes were introduced......Farmers certainly wore the brunt of that depression which was mis- labelled a those lying politicians and bureaucrats ever slept at night after what they put people through is beyond me......I hope there is karma.

And anyone who was caught in the extortionate interest rate regime of the day needs a medal for enduring the meddle.

I started farming in the mid 80's, %18 interest but if I slipped over my limit it was %24. I remember buying cattle out of the Waikato and it was very tough in dairy land, I used to find it quite depressing but I just kept on trading bulls and came out the other end much the wiser for it. I was amazed those dairy farmers I used to deal with managed to get through, I suspect they could manage their costs a lot better than today.

Was it even legal what those politicians did back then?

If farmers could take out all the bureaucratic costs they would better equipped to come through this period.

Many of my frIends didn't make it, they work in town or Australia and all miss the farm, mind you they have forgotten a lot of the bad bits, every day isn't a winner and every job doesn't require riding around on a motorbike yelling at dogs all day. Shit happens, especially when you have sheep.
I remember when GST came in, I had to do my books a lot more often . I remember thinking well at least income tax is going to come down to a %15 fixed rate, then David Lange had cup of tea and we all ended just paying a lot more tax and so it has been ever since.

Farmers were fodder.....the big political agendas cost farmers dearly.....should farmers have been used as a political football who suffered the consequences of implemented economic and social policy and agendas? We got absolutely punished for the politicians and bureaucrats mistakes......those politicians and bureaucrats didn't give a toss about farmers or the loss of opportunity in trade and farmers should have been compensated........and still the dodgy sleazy system has never been held to account.

The select few made millions, only Winston Peters and the Wine Box ever made it to press.

Totally agree skudiv...and this from an accounting firm that thrives on media coverage for its relatively new Agribusiness unit..arguably created to ride on the coat tails of the surge in dairy conversions, GDT interest and ballooning eclipse of dairying in the economy...and he expects media to ignore the downside...maybe ignore him too.


Now if this KPMG head had gone on about the shallow kaw towing reporting and lack of investagative media in relation to Fonterra then he my have a point. He'd be quite right to say the media just regurgitate any old tripe Fonterra email to them but then that is the reality of MSM today.
Reality is also that even the Government has nailed it's flag to the Dairy mast and if it fails then there's going to be one heck of a lot of casualties, most likely including Auckland housing.


What Mr Proudfoot also misses when trying to downplay the significance of this debt situation is that the 2nd biggest component of rural lending is in sheep farming and that is also at crisis levels of profitability. By all accounts schedules are heading south again next week from already dire levels because of lack of demand for frozen product. Added to that sheep and beef farmers are likely to suffer collateral damage from the dairy industry woes as many have turned to dairy support as an alternative income stream which could vanish as dairy farmers in survival mode bring their drystock and wintering requirements home. But hey lets blame the media for beating all of this up ah...

Most have totally missed the scale of crisis unfolding in rural NZ.
You cannot pay dairy farmers 12.5 billion less and just sweep it under the carpet.
using a standard multiplier of 7 it will take $84 billion out of the NZ economy each year

NZ nominal GDP = $230 billion = a big hole

that is just dairy. The sheep meat market is in crisis as well.

Then you have 140 billion on deposit in NZ banks that after tax pays near to nothing, they are just nonperforming loans and I don't think people will sit long on their nonperforming deposits when they realise the scale of the problem is much worse than we have been lead to believe and the risk of OBR is just a question of time.

A loan well made is one that sees all p & i payments made by the borrower as per the agreed schedule.

From a classical bankers point of view a loan that does not maintain its settlement schedule reflects poorly.
While the GFC gave an example of when bankers liquidity stopped. The current situation is based upon borrowers liquidity stopping. The apprasial of such being the life blood of the professional banker.

It would seem lenders miscalculation of borrowers ability to pay, borrowers liquidity has been epic. More so if one considers the usual borrowers psychology.

Why would professional lenders think that the farm gate price (based upon GDT commodity product sales) be ever upward. Why not make the subsequent loans at lower fgmp levels.
The banks we are talking of, when lending to similar commodity based ventures often require credible and often rated counter parties to enter into take or pay off take terms - even posting cash collateral (that boat may of sailed regarding our new best friends and our contractual embedding in their domestic market).

An accountant told us.

Ummm .... wasn't everyone happy when things were going well to shout the praises of the dairy industry and now things are not going so well it is a BAD thing to mention the problems in the dairy industry......

C'mon BR. Be a unthinking patriot will you please? :-) remember,NZ economics about optimism and not real math or science or reality!

Who is going to pay for this?

Thank God Auckland is doing well enough to carry us for a few years.

LOL. It would be interesting to determine whether Auckland homeowners are collectively more highly geared than dairy farmers. Not sure where my money would be on that one.

It's gotta be doing well, why else would house prices be breaking all records?

I has come to this. Maybe it is time to legalize marijuana. That would be "innovative". It might help to calm some nerves and make some money.

I am not joking. It is working out fine for Colorado in the States.

For an accountant, saying the word, "innovation" like a druids incantation, is meaningless. If we "need" to "innovate", then let us just do it. NZ needs to go full on HIPPY, and do it now.

Spot on , Kate. It's interesting that the graph above shows a similar trend line for both dairy and household debt.

So the buying and selling is a tax free capital gain, so how does the "carry us" bit work exactly?

Reading this from KPMG, I have to wonder whether the financial services and banking sector, of which KPMG is a part, has a single useful idea to offer New Zealand farmers.

Presumably KPMG and its banking chums were enthusiastic (for all the right reasons, of course) about getting the dairy industry into its increasingly vulnerable and debt laden state. After all, having the industry dependent on all this financial advice and the associated credit lines is meat and drink to KPMG and the banking sector.

Now that they’ve ridden the horse into the ground via business strategy idiocy and debt overload, calling on the dairy industry to innovate – and this in no clear commercial fashion - reads merely as a desperate demand to keep the profit flying upwards to all those that helped bring the industry to its present state but have become used to feeding on it.

No, they have no useful idea how to help NZ farmers, they are parasitic in nature and it's hard to change your spots.

Haven't heard much from Minister Guy lately about "export double" recently.... But hey flag change anyone...?


The export double is still on the table, it was always just a number dragged out of the air, to make us look good to our rating agencies. You know, the 'we have a plan' stuff, just need to double the amount of sunlight we get, lets get Bernard onto it right away.
The level of knowledge in MPI appears to falling seriously short of what is required.

Next year we require you to;

Fence all your streams
Reduce emissions
Come into line with the clean stream accord
Reduce nitrate and p run off.
Meet all the new health n safety requirements ( get lots of liability insurance just in case)
Pay an extra %8 in rates and cough up some more road user charges
Do your bit for the local economy by employing a local
Accept that it's just good business when corporates get decent premiums out of unprofitable meat companies.
Above all keep your chin up, your country needs you, so does your bank.

Sell the stock and that gets rid of most of the listed problems. Get a horse no RUC"s.
Then lock the gate and that should relieve you of "the 5th one".
Use farm for recreational purposes only!!!

From experience getting a horse was the beginning of all my health and safety and acc problems.

Was that from dismounting in a rather unorthodox manner Belle ?

Pretty much. But I remember getting bitten wasnt much fun either.

Maybe a mountain bike would be a better idea? I have no experience in these matters mind you, apart from being quite skilled at falling off a horse.

Health, saftey and ACC. Heck you got off lightly. Or did you conveniently forget the financial one.

In the 80's interest was the major cost on many farms then it wasn't such a big deal, then it was a tool to get ahead. Many of us with little debt are still struggling with what modern farming has become.
Like I said work hard ,the bank needs you

Hi Andrew j, and anyone else who wants to help. I am a sheep and beef farmer, and I wondered if you have an idea of the interest rate we should be paying? We roughly have an equity ratio around 75-80% (that's stock & plant+GV land)
I am just looking for a range as things we are hearing from other drystock and dairy guys are not close to what we are paying and been offered . Any input would be gratefully appreciated. Thanks

For sake of comparison I would be in a similar equity ratio and am offered 1 month to two year money at early to mid 5%s moving up to early 6%s for 5yrs.

Thanks SS
Yeah that is about 100 basis points lower than we have been offered so I will be taking that to the bank :)

We are paying 5% floating with ASB, we have over 90% equity though.

Might as well hold off on all those costs until after the Banks take possession, put the compliance costs on them. For those in the doo doo of deep debt anyway. Might have to get myself a job at the ministry just so I can have a crack at the banks when it comes.

We've had all sorts of cunning plans from this Government - double our dairy exports was just one.
There was the mining - just let us rip into the national parks and elsewhere, open up for oil exploration and so on and we'll all be rich I tell you. How's that working out Gerry?
You will note that all of these ideas include our big cities doing jack all but consuming the proceeds.

What a contradiction of a country we are. 'Clean Green New Zealand' vs 'Dairy, Dairy, Dairy'.

Been out of the city lately I_O ??

IO, they're not mutually exclusive.

Well said Aj . I think the export double plan is laudable but they didn't put anywhere near the resources required into it to make it plausible. When terms of trade were at record highs credit was claimed that the plan was working,now they have dived...crickets. To achieve the goal we need to get up the value chain not rely on being more efficient at commodities, which is where bulk of govt funding has focused.

How stupid of me to question the plan. Clearly the answer is to export our intellectual property so the Sri Lankans can become self sufficient... and if we are really successful we might succeed in enabling them compete against us in other markets. Way to go!

Some more win - win coming up. Look for some live dairy cattle exports coming up soon.
""It's actually a win-win. It's helping grow the industry and create more demand for New Zealand milk," farmer and Fonterra director Ian Farrelly said."
Family silver and all - with Directors like these .........

Cows have been exported to China and Asia from New Zealand for years.

Tanker drivers report that there are a lot of "stressed out farmers" out there.

Should we take this as an accurate reflection on the state of the industry, over KPMG Ian’s Proudfoot comments?

Given that KPMG also audit, and advise on some of the big banks I would have thought his comments could be construed as being inappropriate.

Also doesn’t it take years and years to convert a farm to some other use? And many more years to become profitable.

As a nation can’t we therefore express concern, especially when we have been told for decades that we are so reliant on the dairy sector for our exports dollars?

Tanker driver usually have the finger on the pulse of farmers better than any other milk company employee. ;-)

Using a high saturated fat (butter, pork, lamb chops, fatty mince) to cure cancer! Cancer cells can not metabolize ketones.

I have an innovation. We could sell our butter as a cancer medicine- just as Manuka Honey is selling for big dollars

Travis' book highlights the pioneering work of Dr. Otto Warburg, MD, PhD, and those who followed in his footsteps.

Most students of natural health are familiar with Dr. Warburg's name, as he won the Nobel Prize for medicine in 1931 for his discovery that cancer cells have a fundamentally different energy metabolism compared to healthy cells.

But they don't know he was a personal friend of German physicists Albert Einstein and Max Planck, and was awarded a second Nobel Prize in 1944 but Hitler prevented him from going to Stockholm to pick it up. He is considered by most experts to be the greatest biochemist of the 20th century.

Dr. Warburg discovered that in the presence of oxygen, cancer cells overproduce lactic acid. This is known as The Warburg Effect. A cell can produce energy in two ways: aerobically, in the mitochondria, or anaerobically, in the cytoplasm, which generates lactic acid — a toxic byproduct.

The former is far more efficient, capable of generating 32 times more adenosine triphosphate (ATP) than anaerobic energy generation. Dr. Warburg concluded that the prime cause of cancer was reversion of energy generation from aerobic energy generation to anaerobic fermentation.

That, he said, was the prime cause of cancer until his death in 1970. One of his life goals was to discover the cure for cancer. Sadly, many, including myself, believe he did, but his theories were never accepted by conventional science despite his academic pedigree.

I can't help but wonder if the increase oxygen intake caused by exercise is bad for you.

It has been known since then, by those open to non mainstream medicine, that cancer loves oxygen. The theory being that the worst thing you can do is open a person up to operate, and let all that oxygen at the cancer region.