Study looks at dairy farmers’ debt-stress
Canterbury dairy farmers are among the most heavily indebted farmers in the world and academics are wondering what stress that is putting them under.
Dairy farmers throughout the country lead global debt levels and have the most expensive dairy land in the world, beating Australia and the United States, but have been largely profitable.
The difficulty lies when cashflows are tightened by a low payout such as this season or when cow prices and land prices corrected during the global financial crisis.
Farm debt is topical with pressure coming from drought on the east coast of the South Island and sheep and beef farmers also struggling with low lamb prices.
The best guess is that perhaps 10 per cent of farmers hold as much as 40 per cent of debt.
A Lincoln University study hopes to shed more light on these levels and the toll it might take on farmers.
Farm management and agribusiness lecturer Bruce Greig said the study would help farmers get a better understanding of debt and the pressure it put them under as managing debt and its stress was one of the key attributes of a modern farmer.
Dairy farmers in particular had leveraged rising land prices the last decade to build their farm portfolio with debt taken on to finance investments.
‘‘If you borrow at 6 per cent and land prices rise at 10 per cent to 15 per cent then it makes sense . . . The trick is to have the cashflow to service the debt even when the milk price is low and it all comes tumbling down when the milk price goes down and the land price stagnates or decreases.’’
During the financial crisis dairy cow values dropped 50 per cent and land prices by 25 per cent.
Land prices have since risen, but the low payout at Fonterra’s forecast of $4.70 a kilogram has made reaching a break-even point difficult for some farmers.
Greig said he took students to a farmer who had $12 million in assets and $10m in debt before the financial crisis.
‘‘All that was revalued and he ended up with an $8m farm and still $10m in debt . . . All he could do was hang [o]n and the bank supported him because of his human factors [including] good integrity. The banks would have lost out if they sold up.’’
The farmer had his own farm and had several sharemilking agreements.
Greig said the farmer was prepared to have an ‘‘enormous’’ amount of risk and that had its upsides and downsides.
The farmer accepted the risk factor when it went against him as well as when it worked in his favour, he said.
He said an argument could be made that he had invested in good debt rather than bad because he had invested in land and although farmers could be accused of speculating on land prices, history showed they had consistently gone up.
More conservative farmers would have less debt.
‘‘Debt has had a fairly high profile especially among dairy farmers, with 65 per cent of it held by dairy farmers. There have been concerns that has been too high or the growth was too high or it’s too risky and that’s what sparked our interest.’’
The study would look into debt stress and whether bankruptcy still had the same connotations, he said.
The study would be expanded to sheep, beef and arable farming.
Sheep and beef farmers had less debt than dairy farmers mainly because the risks and price fluctuations were higher. They may have been on farms for generations and reduced debt over a longer period.
Dairy farmers have a stronger cash flow with payments spread over the year than sheep and beef farmers and can manage debt better which was attractive to bankers.
Dairying’s sharemilking industry has big expenses and added to this is the cost of dairy conversions.
Greig said acceptable debt depended on each farmer’s situation including their solvency, their debt to equity ratio and how profitable they were to service debt.
He said banks held most of the information with little known about the distribution of debt likely to be concentrated to 10 per cent of farmers holding as much as 40 per cent of debt.
Dairy farmers’ high debt was partly because banks were willing to lend to them.
Carrying the most expensive land had also made dairy farmers less competitive.
The trick is to have the cashflow to service the debt even when the milk price is low and it all comes tumbling down when the milk price goes down and the land price stagnates or decreases.
Soft-shoe shuffle: The New Zealand Merino Company (NZM) plans to do more strong wool business and brands on the back of deal with a Danish footwear company worth $1.5 million to farmers.
NZM is looking at other contracts for farmers providing quality strong wool in partnership with companies producing high-value products.
Chief executive John Brakenridge said the same model the company applied to pioneering fine wool sales in the active outdoor market would be replicated for strong wool and new branded initiatives would be developed.
Unlike previous ‘‘huge industry plays’’ NZM wanted to work directly in a market-led approach with partners and a small group of farmers, he said.
‘‘It’s where NZM first started with dedicated resources going in and it’s basically applying the fine wool model for strong wool. Prior to this a lot of people have tried with a big step industry solution and we are starting with a grassroots approach and working with people aligned philosophically with what we do to get runs on the board.’’
NZM announced this week a two-year deal to provide strong