Not looking so rosy for NZ dairy farmers in Jhn Key's rockstar eonomy

John Key's "rockstar eonomy" - not looking so rosy for dairy farmers - or anyone else that works for a living
Banks to get tougher on dairy farmers after milk price forecasts fall

Robyn Edie

"Everything points to the possibility land prices might go down," says Waikato accountant Peter Hexter.

Stuff,

29 January, 2016

Banks will take a tougher line with farmers and there's potential for land values to start falling, say some industry number-crunchers after new milk price downgrades and pessimism about market recovery timing. 

With major dairy companies Westland Milk, Open Country Dairy and Fonterra cutting their milk price forecasts for the 2015-2016 season and world commodity price recovery predictions now pushed out to the second half of this year, balance sheet scrutineers are gearing up for a new season starting with a lot of red ink.

DairyNZ said the on-farm cash income of farmers from all milk production this season will be under $4 a kg of milksolids as a result of Fonterra, the country's biggest milk collector of raw milk, dropping its forecast milk price 45c to $4.15.

That was because some extra Fonterra payments for this season were shifting into the 2016/17 season, and  little payment was carried over from the 2014-2015 season, the organisation said.

Waikato accountant Peter Hexter of Cooper Aitken said banks had to their credit been generally supportive of farmers but the pressure would now come on.

"We know of people banks have been quite tough on and we expect banks to look at some people more closely.

"I've sat with banks myself and they've said they're happy to lend this year (2015 season) to help cashflow but it won't be there next season....they won't be inclined to help out. So far banks have been very supportive but another season of low cashflow...."

Hexter said bankers have told him banks are considering raising their margins even though interest rates are low and being held low by the Reserve Bank.

This could mean that to cover their risk of farmers defaulting on loans, banks might charge a rate above the mainstream rate.

Hexter said he was "not yet" providing on the books for a fall in farm prices but there was potential for it.

"There is real potential. If you go from history the answer is no, but everything points to the possibility land prices might go down."

There had been no evidence to date of pressure on land prices despite the milk price slump, Hexter said.

"But return on investment? I don't think it's there."

Meanwhile, there's been a prediction of "truly significant" declines ahead for New Zealand farm prices.

It's come from Melbourne research and market analyst Craig Ferguson, who in April last year told Fairfax Media the global dairy price fall would be steeper and last longer than predicted by the New Zealand industry, which was then promoting a recovery within six months. 

In a book Debt, Defaults, Disinflation & Demographics, published this month but started in 2014, Ferguson says to expect a global recession in 2016 and 2017 with "significant asset price falls".

He writes that New Zealand property and stocks would fall by 30-50 per cent, and the New Zealand dollar could fall to US40c. Further falls in dairy prices to 2002-2006 levels (around Global Dairy Trade US $1250-$1750) remained likely. 

The new 2016 year has ushered in a global stock market plunge, global growth concerns and continuing weak commodity prices.

Ferguson, director of strategy at Australia's Antipodean Capital, was previously at global investment bank JP Morgan, and ANZ Investment Bank.

Taranaki accountant Mark Irving, a partner at BDO, isn't putting money on farm prices falling.

Farms were still selling for strong prices in the region, a reflection of confidence in the long-term future of the dairy industry, he said.

But he believed banks would struggle to agree to finance some farmers through another season.

"We have no idea what Fonterra is expecting to announce as the advance rate for 2016-2017 but there's no indication it's going to be much higher than now. 

"Banks with a small proportion of their clients are going to say you haven't been making a profit since $8.40 (2014 payout) and while low prices haven't to date impacted on asset farm values, we're looking at how much security you have. I think with a small proportion of clients they will be struggling to says yes, we'll fund them through again."

Waikato's Nigel McWilliam, partner at Diprose Miller, said dairy farmers' "tight times" were now approaching two years.

Their earnings deficit was now tracking at $1.25 a kg.

Offsetting this, the weather had been kind with rain, production costs were down because of tight budgeting, and there was a "whole lot of welfare support" available including Family Support through WINZ and use of Inland Revenue's income equalisation scheme for tax purposes had been "massive". 

McWilliam said speculation about a recession and fall in farm values was premature.

Tourism and construction were doing brisk business and land was a "scarce" resource.

New Zealand farm values had not dropped during the global financial crisis, he said.

Values had been held up by family-held loyalties and bankers. Land assets were the best investment to be in in high inflation times, McWiliam said.

Real Estate Institute New Zealand rural spokesman Brian Peacocke said the impact on future farm values of the latest milk price downgrades was hard to gauge. 

Fonterra's announcement had reinforced that a number of farms would be in a financial loss situation this year but "farmers are always optimistic" and inquiries for good farms were still coming in, Peacocke said.  

With the Reserve Bank this week holding the official cash rate, which influences trading bank mortgage lending rates, at 2.5 per cent and signalling further rate falls, and the Kiwi dollar value falling, the property industry would take the positive side of the "glass half full, glass half empty" adage, he said.

The rural property sector, dairying in particular, took a long-term economic view. 

Peacocke noted the outlook for beef was very good, lamb earnings were under pressure but had been "reasonable", and the threat of El Nino drought had eased in some areas with good recent rainfall, Peacocke said.

Kiwifruit sales were booming and the horticlture and wine sectors were in good heart.

Dairying industry accountants said their clients were not profiting generally from low interest rates because many had been convinced by their bankers two and three years ago to commit to fixed interest rates.

Federated Farmers dairy chairman Andrew Hoggard said historically low fuel pump costs did little to ease farmer budget pressure.

Farmers' fuel costs might seem "huge to townies" but cheaper prices at the pump made a neglible difference.

Hoggard, who farms more than 500 cows near Feilding, said given the world oversupply of milk, he had set his farming system around a $5 a kg budget.