Have banks signalled they've had enough of funding the dairy industry? If funding is closed off, the new Govt's obligations for the industry are likely to be expensive and even more stressful

Townies don't like us. Are our bankers joining them?

Rural borrowers currently owe banks in New Zealand $60.4 bln, according to the Reserve Bank.

With banks over the past decade rushing to support the capital needs of the growing dairy sector, two thirds of this rural debt is held by dairy farmers.

All rural debt represents just 14% of the debt held by banks in New Zealand and pales in comparison to the 56% of all debt banks hold over urban residences ($240 bln). These numbers don't include another $4.9 bln lent to the rural support sector or the forestry or fishing sectors.

But there is widespread concern over rural debt levels, reinforced by wavering milk payout levels and prospects.

The latest Dairy NZ survey data shows the average owner-operator dairy farmer has debt worth more than 50% of their farm assets (including land), while the average 50:50 sharemilkers' has debt worth more than 70% of their assets (excluding land).

But not all rural debt is taken on by dairy farmers. The scale of these obligations by general sector is here:

It seems this dairy dominance has bankers and farmers concerned.

In 2017, there was a marked pullback - or at least a reluctance to add to the pile.

Banks only increased their exposure by +$135 mln, basically holding the line.

This was in stark contrast to expanding support for other rural sectors.

The large sheep and beef sector signed up for "more capital", adding +$666 mln, or +4.8%, to its liabilities in 2017.

More aggressively, the horticulture industry grew its bank debt by +11.1%, taking on +$402 mln in additional debt.

Banks' reluctance to add to their exposure to the dairy industry probably signals an end to rapid expansion of a rural segment that is capital intensive.

The new Government is likely to impose even tougher environmental obligations on dairy farmers. In the past these upgrades and compliance obligations were costly and funded substantially by debt.

New, even stricter rules are likely to require even more 'investment' for things like composting barns, and impose rising costs of operations. But it is clear that banks signalled in 2017 that they are probably not up for additional major industry support for such investment. They can get growth from their rural lending activities from other sectors.

Dairy farmers will be looking at their 2018 prospects with trepidation. Milk payout levels are always uncertain, but funding-required upgrades and modern environmental mitigation will be hard without bank support. And given banks have huge sunk investments in the industry, choices are likely to be tough.

For decades, other farmers have looked at their dairy colleagues with an element of envy at the returns that could be generated. Now the gaze may be shifting back the other way.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment or click on the "Register" link below a comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current Comment policy is here.

45 Comments

There is much negativity about the future viability of the dairy industry. It's quite possible that the banks understand that already and shifting their pawns.

Lets not forget these are real people, families and communities. On farm inflation has been compounding at %7-8 pa for 15 years. The machine got into gear and all the talk was of 'the bright future in dairy'. Remember the $8 payout ? The banks came out and said they could see it going to $10 and couldn't imagine a scenario where it drops below $8 in the future.

Meantime in the USA in the last 10 years ,production per cow is up %14 while ours has hardly moved. The EU has an SMP mountain with no new product into storage so the market has to sort out the problem according to EU Ag head Mr Hogan. Good luck with that.

"Despite high EU SMP exports (663,481 MT through
October 2017 compared to 478,678 MT in the same period of 2016), it must be feared that the increase
in milk production in the coming year will only induce higher SMP production as a side product of
increasing butter production. Hence, the EU demarche to proactively take measures to restrain SMP
intervention buying in 2018, given the low EU SMP prices. The Commission’s view is that is the dairy
processors’ responsibility to manage this problem and that ultimately only the market can solve this
situation. "

"On farm inflation has been compounding at %7-8 pa for 15 years."

The data does not support that claim. It looks like it has been compounding at the rate of just +2.5% over the past 15 years (not including livestock).

Had a talk to my bank manager before Christmas who told me his biggest concern was costs in dairy. Relentless cost increases in non discretionary things like rates, insurance crippling rural businesses unable to pass costs on.
My friend in Gisborne just got a letter with a %50 increase in his rates, mine went up nearly %30 last year. My insurance is going from $2900 to $4300 this year.

As in housing, some good will come of it.
Syndicates and overseas owners will be the first to the door leaving attractive deals for the conservative family farms.
Just like the property market.
We should also express sympathy for the real estate agents at this time.

https://www.odt.co.nz/business/farming/harvard-fund-sells-former-big-sky...

The former Big Sky dairy farm in Maniototo, owned by the multibillion-dollar Harvard University endowment fund, is being sold.
The value of Harvard's holding company in New Zealand for the dairying venture is $105.5million.

An application has been made to the Overseas Investment Office to sell the 5500-cow farms, near Patearoa, to WHL Otago Operations Ltd.

The holding company's financial report for the year said settlement was subject to Overseas Investment Office consent, which is released publicly on a once-a-month basis.

For its year ended June 2017, the holding company revenue was $12million, but it booked a $4.5million loss.

Nah. The agents don't get my sympathy.

They are also to blame for pushing the land prices relentlessly to the over-elevated point they are at.

Like the dickhead who was spruikling a farm near Murchison last year.

"Starter Farm - Ideal for the young guy only $4m"

I hope they all go down screaming.

A farm I drive past every day came up for sale 3 months back. Marketed as a genuine first farm around 60ha asking 2.5 mil. Sold very quickly.....

Destocked with most internal fences ripped out soon after the sign went down, whole place locked up for grass silage, soil turned now it's all in maize.

Another 'first farm' swallowed up as a supplement block.

These figures are averages across all farms including many with no debt and are grossly distorting. Debt should be analysed only across farmers with debt into say deciles - then we would see the real picture emerging and my guess it is not a pretty one.

Debt by kg of milk solids would give exposure on more a a cash basis. Land values are somewhat irrelevant in terms of their ability to service the debt.

We saw this in the 1980's when the farm service sector lent heavily to farmers on valuations instead of cash flows - what a mess ! Seems banks are slow learners - but of course many bankers incentives were aligned with new borrowing so that's what they did.

Project payouts over $ 8 for eternity and all was well.

Agreed. Averages are hopeless for estimating individual farm's positions. They obfuscate, for example, the following factors which any due diligence for a farm purchase would seek:

  • Configuration of farm operation(extensive grazing, winter feed barns, robot milkers, cut-and-carry to all-weather sheds, and many, many more 'dairy farm' possibilities)
  • Availability of off-farm grazing/wintering/feed cropping etc
  • Milk curve (e.g. all-weather shed with fully robot milkers has a flat milk curve with the probability of 'winter milk' bonus, depending on contract for supply
  • Soil types, altitude, paddocks configurations, shelter, fencing and other very particular configurations
  • Regional council/territorial local authority restrictions (e.g. water supply red-zoning), N and P emissions standards and other environmental constraints or opportunities
  • Effective/irrigated/total farm areas (used as divisor for many KPI's such as KgMS/effective ha

Using averages, even if dignified as 'Benchmarks', is just a first-cut crude analysis pass. Banks and other stakeholders are a lot more subtle than that....

Traditionally, Labour have been better for farmers than National, and National have been better for Maori than Labour. The big parties don't give a stuff about captive constituencies and tend to try and buy votes.

Good doco here on how the stockpile milk powder in the EU: https://www.youtube.com/watch?v=7KPWLSVn0ko

And then dump it into Africa destroying their dairy industries...

Glad to see that might be ending.

https://www.stuff.co.nz/business/farming/94890531/fewer-dairy-farm-listi...

These guys chase the money, first dairy in a big way then onto sheep beef and horticulture. Getting mum and dad investing in farms isn't too rosey currently so how do we keep investors happy - consultancy

https://www.interest.co.nz/rural-news/51966/farm-syndicator-myfarm-sees-...

January 24, 2011 - Farm syndicator MyFarm is putting proposals together that forecast annual returns to investors of up to 12% per annum before tax, including some capital growth. We’re putting proposals together that forecast 10-12% returns (per annum) made up of 7-9% cash and a bit of capital growth based off productivity gains

According to Septembers Dairy Exporter magazine end of 2016,43% of Dairy Farmers had debt higher than$30.00 per kilo milk solid.
Of them12% were higher than $40.

That means for > $ 40 debt / kg between $ 2.00 - 2.40 / Kg just for interest - assuming interest rates of 5 - 6 %.

Add in some capital repayments and a payout in the mid $ 6.00's and this just doesn't stack up.

Eventually someone's going to have to take a hit on these totally out of whack situations.

You pay principal, you then pay tax. A lot of tax. Unless you can accumulate a loss elsewhere. Oh yea...buy another property ;-)

You pay off principal you then should have more money in your back pocket. Tax is only paid on profit, which is after interest is deducted. Interest is based off debt (principal) you have, repay the debt, no interest to deduct, but also no interest to pay.

That's confusing me. Paying back debt is with income after tax, right?

You're on the money

Youareright, It just isnt that simple. I really dont know where to start. However what is your profit? Make your farm more valuable by spending that 'profit' on stuff that is tax deductible. Then sell the farm at a tax free profit and start again. Upgrade another...Or sit tight pay back debt and pay tax on all that principal. Once you borrow a few million for a farm, times that by half again for taxes due to repay that few million. (Not including interest in that calculation) With the huge amounts of moolah borrowed on these dairy farms I dont think they will ever drag enough milk out of the old biddies to pay what they gotta pay when you add debt+interest+tax

Yes it is complicated. Depends on ones risk appetite. Low risk i think is to sit tight, pay back debt. High risk, put that money back into the farm, hope this adds value and prey for capital gain. If there is none, or values have dropped, that's the risk.

For years I've watched farms with good improvements, fail to get a premium in the market.

Would that be because potential buyers can see limited scope for their own capital gains from such properties, and that the operation has to be run more fully as cashflow positive?

I don't think so, lot of emotive issues with farmers.

Many dairy farmers are just land bankers, with a view to what the property will be worth in 10-20 years, and what the milk price will be in 10-20 years. It isn't for the faint hearted, or weak minded. How do you think the farmers with lower debt levels got to that position? Buy and hold for the long term, and the rewards are huge.

It only works when milk prices are about total average cost to produce, though.
When the metric shit tonne of milk products from China and Russia start to flood the market, the story is going to be very different.

I wonder how you get out of bed in the morning.

If the price of a bigger block of cheese is any indication their expectations arent that great
http://www.cheesereporter.com/cheeseaverages.htm

I found a longer series of farm prices, stretching back through the 19th century.
http://faculty.econ.ucdavis.edu/faculty/gclark/papers/Agprice.pdf
Dont get your hopes up about the price of cheese, changing the farm use is a better bet, or convert it to lifestyle blocks.

Farmers have always chased Capital gains (modern term used is "capital growth", and as a result land prices have been set by what banks are prepared to lend first and foremost, not commodity prices or interest rates. So the banks figured out they could make more money lending more (who knew?) some time after 2000 (banks started throwing money around like a lolly scramble), until the money supply ran tight in 2009. After a brief contraction that had a few casualties things carried on as per normal.

However hopefully the banks are waking up to the age old areas of risk that hit farmers: Payout, production and debt servicing (interest + repayments). You expect one of the variables to be against you in any single year. When you get 2, it is tough going. If you get all three, it's usually terminal.

As farmers chase capital growth, they already have one of the 3 against them, before any dry spell or crap GDT auction results. So the banks then have to carefully manage the terminal cases through the downturn until things improve, when they force the sale of farms by one means or another, all the while milking penalty interest rates where possible.

I think Crafars where put into receivership in Oct 2009. The darker side of chasing "capital growth" emerged, as it can be pursued at the expense of animal welfare and environmental damage (EW 2007/08,Horizons &HBRC 2010) (it's all in Wikipedia) And we wonder why dairying gets a bad rap?

PLANT BASED PROTEINS -- BURGER OF THE FUTURE

A few small but extremely well financed companies are introducing a new competitor in the protein market and it is striking at the longest standing icon of Americana -- the all American hamburger. The national chain TGI Friday placed the plant based patty on the menu in its 400+ restaurants this past week. The offerings from the designer labs are created to look like and taste like traditional meat fare but be cleaner, more environmentally friendly and healthier.

One of the companies, Beyond Meat, is designing products to look exactly like traditional burgers and sausages and other recognizable meat products. The audience they are targeting is young people and their advertising campaigns feature young, attractive athletes heralding the benefits of plant based proteins like no cholesterol, lower fat, less saturated fat, no GMOs or gluten and healthier all around. These health claims are accompanied by larger goals of reducing global warming and protecting animal rights.

The beef industry would be remiss to discount this initiative and the plant based meat campaign strikes at the heart of the beef industry's future -- young people. Young people want to know more about the food they eat and how it is produced. In order to attract the young to our beef products, more information must be provided and in a form that will resonate with them on a personal level. The larger food companies are introducing ideas for supply chain links taking the consumer back through the supply chain to see, hear and understand how the product is created.

The message must include explanations of production practices that are environmentally sound and sustainable. Producers also must be able to show how animal treatment throughout the beef pipeline is sensitive to the animal's needs of good health, proper care, and sound nutrition. An explanation of the benefits of beef in the diet is critical to the consumers decisions at the purchase point. Expert nutritional advice has returned beef to its proper role in a balanced diet and this story needs to be told in the proper forums like classrooms -- the natural setting for young people coming to understand food and diet.

Ignoring or underestimating the initiative of plant based proteins would be a colossal mistake. The companies working on these initiatives are backed by some of the country's wealthiest individuals and most prominent scientist. Countering the initiative must be done intelligently and strategically by recognizing the target [consumers and especially young ones] and their concerns about production, nutrition, and the environment.

The informed young now that they are slowly being fried due to the impact of green house gases. They understand that the deniers are either ignorant or funded by the likes of the Koch bros.

The production of 1 kg beef causes about 13.3 kg of CO2. The same quantity of CO2 is released when you burn about 6 liters of petrol. And this does not include transport (though perhaps we in NZ do it for less)

No amount of expeditionary messages can overcome these facts. Gives eating yourself to death a whole new meaning.

http://timeforchange.org/eat-less-meat-co2-emission-of-food

If you are wealthy, you wont have to worry about such things. The best mitigation for a changing climate is getting wealthy. Just to be clear 80% of the global population aspires to the lifestyle of the 20% that are causing 80% of the CO2 emissions, and they wouldn't have a second thought about it if given the opportunity.

Only because the majority of those 80% are poorly educated and don't understand the long term consequences of it. A great many people aren't so damn selfish.

I agree that a great many people aren't that selfish, yet the majority are. It is that majority that is educated indoctrinated to aspire to that "lifestyle". How else do you keep the economic growth model going? How else do you prevent them from questioning the status quo? How else do you enslave the masses?

A bit like the omnivores wanting to be carnivores, but we know how well that worked out for each group regardless of position of privilege.

Vegetarian sausages have been around longer than I have, they look similar and if you are buying cheap sausages the taste isn't too different, but if you like beef there is no substitute. You can't create a steak by computer design.
With a growing population, shrinking agricultural land the world is going to need more food, and if people want to risk their health on synthetic burgers thereby making more meat available for those with tastebuds, thats great news all round.

The new 'meats' will not be synthetic. They will taste no different and in all likelihood be healthier. In effect brewed a bit like a beer ....you ok to drink beer?

Memphis meats (backed by Bill Gates) makes its meat in a lab from the cells of cows, chickens, and pigs. One meatball takes three weeks to propagate in a steel tank. “It’s not ‘lab-grown’ meat,” says co-founder and CEO Uma Valeti. “It’s like a meat brewery.

Cells eat a diet of glucose, vitamins, and minerals to proliferate.People who tasted the cultured meatball couldn’t tell that it was grown from cells. “It has an undeniable and intense meat flavor. Our goal was not to be a vegetarian product.”

http://fortune.com/2016/04/25/memphis-meats-lab-grown-meat/

Great, I hope you enjoy your non synthetic 'brewed meat.' While I am miserable eating my well marbled fillet for brunch. Wurst of all I am having porterhouse for tea tonight, I wish it was brewed meat instead, I am sure it has all the benefits that natural meat has, high in omega3 etc. In the same way that non synthetic margarine has all the health benefits of butter, and tastes just as good if not better.

..ah yes the attitude of a 'don't give a s## about anyone or anything else'. You will be honored in the rest home as a caring insightful and wonderful example of humanity. Good for you old boy..wollow away.

Before labelling as ignorant or in someones pocket - all whom question the effect of increased CO2 on the temperature of the earth - take some time to read this careful analysis by someone who has spent his working life dealing with infrared radiation and atmospheric gases.

Please tell me if at the end of this analysis you are still 100 % confident that CO2 causes warming.

http://ilovemycarbondioxide.com/pdf/Understanding_the_Atmosphere_Effect.pdf

Careful analysis! Nah..won't be wasting my time on such rubbish. .And we don't need 100%, science never promises 100%. Science is based on best known provable facts at the time.

"This work makes extraordinary claims and yet no effort was made to put it in a real climate science journal, since it was never intended to educate climate scientists or improve the field; it is a sham, intended only to confuse casual readers and provide a citation on blogs. The author should be ashamed".

https://denierlist.wordpress.com/2012/11/23/joseph-e-postma/

"science never promises 100%"

And yet eclipse times can be so accurate they can tell you almost to the second when it will happen anywhere on the planet.

Godel's completeness theorem was published as his doctoral thesis and there is no evidence he was ever ashamed about that.

I wonder what the difference is between "reaL' science journals and "unreal" science journals?

This talk of synthetic foods. Where do the initial ingrediants come from and what form does the energy for the process come in? Can it be done in small batches so as to bypass the need for wasteful transport costs or is it basically the same as the current distribution system?

Been a lot of investment in creating high protein fish food from grains especially GMO Canola. they have been quite successful, so spun off into protein for the rest of us.
https://geneticliteracyproject.org/2017/12/04/salmon-may-soon-fed-gmo-ca...