Thursday 25 February 2016

Australian banks will drive NZ dairy farmers to the wall

How long will the banks stick with dairy farmers?

An agriculture consultant is warning that low milk prices could hang around for some time and dairy farmers need to re-think their farm systems in order to survive.

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25 February, 2016

A Federated Farmers poll last week found more than one in 10 dairy farmers are now under pressure from banks over their mortgage.

Minister for Primary Industries Nathan Guy met with three of the big banks yesterday to discuss dairy debt and said the banks had told him they will stand by struggling dairy farmers.

Mr Guy said the medium-to-long-term outlook for the dairy sector was incredibly rosy but some dairy analysts said it was anything but. 

Agriculture consultant Alison Dewes is one who believes the industry is undergoing a structural change rather than experiencing a short cycle of low prices.

She told Nine to Noon the average dairy payout of $4.50 may never recover to even the $6 mark and widespread farm foreclosures were inevitable.

She said banks had been front footing it with farmers where they could, and working with those that had been showing a moderate level of distress.

"But we're getting to a point now where things haven't played out quite as predicted. We're seeing what's potentially a structural change in milk price rather than a cyclical change where we're moving into almost three years of $4 / 4.50 payout and average farms can't just keep weathering this and we actually have to possibly face some quite difficult times ahead for New Zealand."

She said one of the reasons why New Zealand was getting into difficulty was that it was no longer as competitive on the global stage.

"New Zealand's no longer a low-cost producer, and there's nothing holding back further production coming out of the States, who can produce milk cheaper than we can now ... similar situation in Europe, and Australia - you can purchase farms, rain-fed, land there for half the price of New Zealand and be receiving a $6 to $6.50 milk price."

She said there was no reason to believe New Zealand would suddenly capture more of the global market when its competitors were able to produce more quantities and cheaper milk.

Agri consultant Alison Dewes sits at Auckland domestic airportAgri consultant Alison Dewes.   Photo: RNZ / Philippa Tolley

Ms Dewes said while banks had been working closely with some farmers to make their farms more efficient and get cost structures down, there was only a certain amount they could do to shave costs.

She said most farms could cope with taking on more debt for one or two years but some would reach a tipping point soon.

"I think all farmers are going to be under pressure if they haven't already shifted their systems into lower cost and potentially even diversified farm systems so at a $4 or a $4.50 payout I would argue that 80 percent of our farmers are going to be borrowing to keep going."

She believed dairy farmers potentially faced even less than $4 price this year and next. 

"So that will be almost entering for most farmers a third year of hard difficulties. 

So I think that although we're talking about 12 percent of loans being non-performing now ... we're potentially looking at that number being more like 40 percent in a couple of years time."

She said there was a lot of hype in the industry when dairy farmers were getting high prices and farmers were encouraged by central and regional government to intensify when the common belief was that economic wealth could be achieved from doubling agricultural output. 

"They were allowing permissive development schemes, irrigation schemes ... it factors into farmers psyche so the central government and the regional governments were pretty much facilitating permissive growth."
She said farmers borrowed to facilitate higher intensification but the by-product of that was farms operated under a higher cost structure and marginal herds.
"We actually completely lost the plot in New Zealand on this sugar rush diet that we were on and we didn't understand what true profit is."
Ms Dewes said three years ago she was telling her clients that the country had to sensitise the milk price back to $4.50.
"Now people think you're a fruit loop when you do that but the reality is that your days in the sun don't always last. We always have to prepare for a year that we're not sure how things are going to be."
She said some farmers were starting to realise they could improve their chances of survival if they moved to a system of home grown feed and shed some of their stock.
She said it would almost be a paradigm shift in farm systems to what dairy farmers were doing in the late 90s and early 2000s before palm kernel came into the country.
"What we end up is fundamentally a shift to better, fewer, well fed cows, doing more per cow and sure you might not get the same per hectare but your cost structure moves down and you focus more on doing the best you can with what's left."

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