Downturn exposes vulnerability
The dairy downturn will affect us all at some stage as the depressingly low onfarm returns ripple through the economy. The former chief executive of Fonterra, Andrew Ferrier, used to say that when dairy farmers were smiling the country was smiling. The converse is also true.
It’s tempting to say that dairy farmers have only themselves to blame for taking on too much debt on overly optimistic scenarios provided to their bank managers.
Farming is no different to any other business that has an element of risk and you would have thought advisers and banks would have stress-tested the viability of proposals using the worst-case scenario.
The worst case scenario has arrived and clearly some very serious mistakes have been made. Large scale and high cost dairy farming has turned out to be a very marginal business at best unless, of course, debt is at manageable levels.
Banks, however, were lending at 50-60 per cent of the cost of converting farms so it’s easy to see how the total dairy farm indebtedness has climbed to nearly $38b nationally. To put that into context that’s only about three times the student loan debt.
Dairying is starting to look like the typical New Zealand agricultural fad industry except on a massive scale. Initial optimism led to far too many jumping on the band wagon thinking fortunes would be made. Gold fever, in other words.
All industries go through corrections or rationalisations as conditions change. What is concerning for the country as a whole is how vulnerable NZ Incorporated is to changing conditions over which it has no control, and how frequently and quickly they occur.
The smart dairy operators have probably already taken their profits and left the industry. As one commentator put it, farmers are not so different from urban speculators. Some will have converted to dairying just to reap the returns of a land sale at the top of the market.
High equity farmers will no doubt pick up some of the farms going under at prices unheard of a few years ago. You can’t blame them but it’s a perfect example of how the rich get richer.
The effects of the downturn will be felt at all levels. I doubt that many of the big operators will be pulling their children out of private schools or selling their luxury vehicles or cancelling their overseas trips.
It will be the truck driver whose hours have been cut or the small contractor who has beefed up his equipment and staff who will feel the pinch most.
One downstream effect not so frequently mentioned is the spending power of the retired farmer whose offspring have carried on farming on the family farm by converting to dairy. They will want to help out their sons or daughters by putting back some of the cash they took out when handing over the operation. Their spending will have been an important fuel for small town retail.
The real question is what the Government needs to do to ensure the damage is limited or mitigated.
We seem to be viscerally averse to any sort of Government bailout even when the European Union is bolstering dairy prices for its farmers.
There is no level playing field in the international dairy trade and probably never will be.
The Government cannot be blamed for not wanting to throw good money after bad and some things must be allowed to fail.
So the dairy industry must take its lumps but the Government can at least stop farmland from falling into foreign hands. Foreign investment funds have deep pockets and invest for the long term so will be eyeing up the opportunity of building up portfolios of New Zealand dairy country.
The tricky issue about foreign buyers is they will help prop up land prices. Banks need those prices to remain high in case they have to foreclose and rescue their loan money.
The other issue is whether the Government can do something to stop rich farmers buying out farmers less well endowed with equity but just as efficient and hard working.
Lessons from the dairy debacle will be learned, you would hope. Government and organisations like the Reserve Bank can do only so much. The crisis should make individual farmers and their advisers more cautious and more realistic about prospects. The dairy industry will have to work harder at spreading the breadth of its products. It has strived to diversify but that is not as easy as it sounds. Adding ingredients to the food product developed from the dairy component also increases vulnerability. Developing brands in the bigger markets takes years and massive investment.
Although the current disaster does not engender great faith in the business prowess of New Zealand farming and banking we should remember that New Zealand farming is still the most sophisticated and least cushioned in the world. The land is still there and many options are available. Irrigation paid for by big dairy prices can be used to grow grass for other purposes.
Most farmers will get through with a bit of pain as they always do. The rest of the country will have to grit its teeth as well.
The smart dairy operators have probably already taken their profits and left the industry. As one commentator put it, farmers are not so different from urban speculators.