Karen Trebilcock
Confidence is down in the dairy sector and banks are getting the blame with talk of capital payments requested and onfarm spending curbed.
However banks are saying it’s not them that are the problem and are scratching their heads as their front line staff come under pressure.
ANZ managing director commercial and agri Mark Hiddleston says interest rates dropped in the past three years and dropped again with the slashing of the official cash rate by the Reserve Bank in August.
As well, the payout is relatively stable compared to recent years yet inquiries to invest in dairying are now few and far between.
‘We are getting inquiries from dairy farmers wanting to diversify into kiwifruit or hops or avocados but not get further into dairy.’
“Farmers have never seen interest rates like these but we are still not getting the people wanting to buy dairy farms anymore, or even expand an existing farm by buying the neighbours or a run-off.
“We are getting inquiries from dairy farmers wanting to diversify into kiwifruit or hops or avocados but not get further into dairy.”
Some farmers have been asked to repay capital but for any business reducing debt makes sense, especially when interest rates are low.
“In the downturn, when the payout was low a few years ago, we supported the dairy farmers and now we’re saying times have changed and you need to start repaying that debt that you should have repaid then.
“In the downturn everyone kind of held hands and supported each other but now, as an industry, we are okay again.
“Costs have risen to make up for when they stayed still and we’re also asking for that support back.”
Hiddleston believes some of the problem stems from the unknown of how environmental issues will impact on dairying.
“Government wants to know why there is not the investment in dairying but we’re saying right back at them give us some clarity about the environmental issues and what the cost of those will be.”
He had heard of some “really sad stories” about depression and suicides onfarm.
“It’s a real shame that this is happening. It shouldn’t be. We have a very large agri portfolio so we have a lot to lose if dairying isn’t going well. We want it running well just like everyone else does.”
Most farmers are “leaning into” the current financial situation and performing well.
“Ten years ago everyone could rely on capital gain but that is gone. Now we want sustainable, profitable dairy farms.
“There are some older farmers who just don’t seem to have the energy anymore and there are a few who think they got away with things in the past so they will again.
“But a lot of farmers are going really well.
“Dairying is a tough, physical job but it is also becoming a more data-led job. Those who can use data, not just financial but also operational data to make decisions, are really going ahead but that is a different skill set.
“If you have that flexibility to do both well, those are the ones who are really making a go of it.”
Findex’s head of agribusiness Hayden Dillon also says Government policy is part of the problem.
With overseas investment in land now curtailed, foreign capital is no longer flooding into dairying.
“This has had a flow-on effect, being a lack of capital into the market, halting the domino effect of down-stream farm sales taking place and the obvious decrease in confidence meaning the largest farms just cannot sell, as they have no market, externally, or domestically as the banks have closed to these borrowers,” Dillion says.
Also, the unknowns around the Emissions Trading Scheme as well as the increased regulation and compliance farmers face are “creating significant difficulties for farmers, particularly those with high levels of debt or who are seeking capital to grow”.
While farmers’ ability to invest in development and acquisitions is being hampered, they are being asked to reduce their carbon footprint which needs new infrastructure to do it.
“If farmers are looking at starting a new project they will need a far higher level of financial rigour around their application than before.
“They need to be engaging independent advice around their budgeting assumptions and will need at least a five-year detailed cash-flow plan to show their ability to service debt.
“Banks are not fussed on interest only and this will mean making allowances for things like tax and principal repayments,” Dillon says.
Although some commentators blame the Reserve Bank increasing capital requirements for trading banks for making it tough for farmers, dairy debt is still rising, sitting at $41.5 billion. Four years ago dairy farmers owed the banks $34b.
At the same time, farmers are seeing their assets erode with farm and cow prices falling and Fonterra shares dropping in value.
Dairy consultant Howard de Klerk points out that according to Dairy NZ Annual Economic surveys the average debt per kilogramme of milk solid had risen from $8.80/MS in 2001 to $25.31/MS in 2018.
“This is a 287% increase in debt per MS while the milk price has risen only by 33% over the same period.
“Interest has now become the biggest single cost item for the average farmer despite the low interest rates. Farmers need to focus on profitability rather than chasing a particular system and lowest farm working expenses per kilogram of milk solids.”
He warns farmers to be careful when trying to cut farm working expenses if it negatively affects production as the interest costs per milk solid could increase faster than the savings achieved.
“In the past, the increasing land values year-on-year improved the equity ratios and could hide the inefficiencies of low production per cow.
“With land prices stagnating or even moving south, those days are well and truly over. Farmers needed to generate a cash surplus, as opposed to simply showing equity growth.
“It is a game changer.”
The industry has been slow to adapt to the financial changes of the past 17 years causing a significant amount of angst among some farmers.
“Low production per cow simply does not generate enough cash to pay the high overheads of today.
“The relentless attacks on dairying in the media and the current Government policies are not helping farmer sentiment either.
“High debt and low production is simply not a recipe for high profitability. With the high overheads, farmers cannot save their way out.
“They need to dilute their costs by producing more milk solids per cow and produce their way out. It is about improving efficiencies and diluting costs.”
BNZ spokesperson Sam Durbin says the BNZ’s basic lending parameters haven’t changed.
“At BNZ we invest and lend for the long term and we are increasingly focussing on helping our farmers through the ups and downs, working with them to make sure they’re making good progress on their repayments when their cashflow allows,” Durbin says.
“While the OCR has been coming down, it’s only one factor we look at when assessing interest rates.
“We also look at things like the cost of funding, the risk, and so on, and we’re constantly re-evaluating our rates considering these factors.
“We look at each customer, their business, their plan, their industry, and the nature of their lending to apply a rate that reflects these costs and the risks and return of the lending,” he says.
“The sector is comparatively highly leveraged and managing this is important for long term sustainability.”
Dillion says knowing the true value of the assets and the risks is critical to taking advantage of any opportunity.
“The silver lining in all of this, as always, is even when things are depressed there are still opportunities for those that can provide the high-quality information and have a proven track record.”
