Declining dairy farm values are likely to continue

Dairy farm values have been declining now for well over a year and there is no sign they will stabilise. The key issue is a lack of buyers with the necessary finance. The implications are starting to get serious.

There are multiple reasons why there is a lack of buyers. The biggest one is a change in bank lending policies. Those policies are set in Melbourne and Sydney where the big banks are headquartered. 

None of the Big Four banks are interested in new dairy lending unless the investor has high equity.  The related policy is that all banks now want repayments of principal whereas interest-only loans were the norm for many years. At least two of the Big Four banks are actively trying to reduce their exposure to New Zealand dairying.

The reason that things are now getting serious is that reducing land values are causing a large number of farms to fail the loan coverage criteria that banks now require and an increasing number of dairy farms are moving towards negative equity. As banks get increasingly nervous about their lack of cover, values can spiral downwards very quickly. It is a situation that feeds on itself.

The word from within the real estate industry is that there are not many dairy farms on the market. However, to the extent that this is true it is only because farmers know that it is a waste of time putting the farm on the market unless they are desperate to sell at any price. Down my way in Canterbury, all recent sales of which I have direct knowledge have had a strong element of bank pressure.

Getting an accurate picture of the extent of the market decline is difficult. This is because there is no reliable published data. The REINZ have their own data but their analysis lacks sophistication and they have put the shutters up on publication of detailed information. DairyNZ has published data but the latest data in their Economic Survey is 18 months old.

I have data from one of the South Island valuation firms through to mid-2019. Until then, Canterbury values were holding up to within ten percent of the 2014/15 peak. However, Southland sale prices were already down by about 20 percent but with few sales, and Westland prices were down by considerably more than this.

Since then, South Island values appear to have declined considerably. There were several dreadful forced sales in Canterbury and North Otago in the middle of 2019 with one particular bank cracking the whip. There have also been schemes of arrangements with some corporate-type farmers where the banks have agreed to restructuring and with the bank taking a loss. These arrangements are always confidential.

My assessment is that values in Canterbury are now down around 20 percent from the peak, or perhaps a little more, but still trending down from there.

In Southland, there have been minimal recent sales although I do know of one sale of a large high-quality farm. It has been sold to an existing farming group who have brought in additional external equity capital.

In Westland, at least half the farmers would get out if they could. My assessment is that values are now down by at least 50 percent from the 2014/15 peak but farms are still not selling.

The Westland situation is despite the greatly improved milk payments from Yili as compared to the weak recent payouts under Westland Co-operative. Dairying on the West Coast is always hard work, but a recent additional problem for the West Coast has been dreadful weather over the last nine months.

I have less information for the North Island but there is no doubt that values have also dropped there since the 2014/15 peak. A few farms have sold well in situations where kiwifruit or other horticulture is an option and this can mask the overall trend.

There are still a few situations where established families can finance the purchase of a small farm of say 80 hectares to add on to an existing farm. It seems that there almost no local buyers for farms of more than 100 hectares and carrying more than around 300 cows.

I said earlier that there were multiple factors at play beyond the change in bank lending policies. One obvious factor is buyer sentiment linked to uncertainties over future environmental standards. This uncertainty affects attitudes of both buyers and bankers. However, I am aware of situations where prospective buyers have taken an option on a property subject to bank finance, but then the prospective sale has fallen over owing to failure to get the finance. This tends to confirm that overall bank policies and sentiment are more important than farmer sentiment.

Another big factor is that in late 2017 the new Government in effect banned the purchase of dairy farms by overseas investors. There are still absentee investors from Europe, the United States and Canada who would like to buy large dairy farms, but such purchases are no longer possible. Any change in that policy by a future government would be highly controversial.

Below the radar, there is still some foreign investment money coming in, but limited to overseas investors purchasing a 24.9% equity stake in existing farming groups, with this not needing approval from the Overseas Investment Office. Hence, there is no public notification of the restructure, or the underlying land price. I know of multiple situations where this is occurring, and there will be many others that I am not aware of.

The big question going forward is where is this all going to end up?   I wish I knew the answer. A key related issue is how will ownership concentration evolve. At some stage I expect to see new groups of urban investors emerge but that could be some way off.

The crunch will really come if dairy prices should ever decline below $6 per kg milksolids. Despite advocacy by some for a vegan and vegetarian future, global dairy demand is still increasing. Hence, a market crash seems unlikely in the short term. But in a volatile world there will still be periods of low prices.

In the meantime, with farmers under pressure to pay back capital as well as interest on their existing bank loans, there are no rainy-day funds controlled by farmers themselves to get them through the next downturn.   How will the banks then respond?

As to how we got into this situation, with hindsight it is very obvious that bank lending policies were far too lax for far too long, compounded by weak oversight by Government. Throughout the first decade of this century, it was common for farmers to be propositioned by cold-calling rural bankers, who were themselves on incentive-base remuneration. The message was that farmers should be giving thought as to how they could ‘grow their business’.

The banks are now trying to figure out how they can get out of the mess they themselves helped to create. In the meantime, the banks are raising their interest margins on existing loans to compensate for the perceived increase in risk. There can be little doubt as to where the balance of power lies.

About Keith Woodford

Keith Woodford is an independent consultant, based in New Zealand, who works internationally on agri-food systems and rural development projects. He holds honorary positions as Professor of Agri-Food Systems at Lincoln University, New Zealand, and as Senior Research Fellow at the Contemporary China Research Centre at Victoria University, Wellington.
This entry was posted in Agribusiness, Dairy, Uncategorized. Bookmark the permalink.

12 Responses to Declining dairy farm values are likely to continue

  1. David Porter says:

    Fairly scary Keith!
    I think you’re right in that the main cause is poor policy setting and oversight by government/Reserve Bank. The problem is that both are forever under pressure to relax lending rules, especially by the banks, but all access to more finance, longer repayment terms and/or interest only loans means is higher land prices at the end of the day because more money is chasing the same amount of land. For supposedly educated bankers not to understand Economics 101 (supply and demand) says a lot I think.
    At times like this there’s always hope of a “soft landing” but if you’re right with 25%+ drop in price already, that will end up in a bloodbath for banks and farmers if the banks force too many sales. It was the same after subsidies were removed in the 1980s when land prices halved (or worse) but the banks were sensible enough at that time in not forcing too much. That was at a time when the biggest lender was the government owned Rural Bank and the others were predominantly New Zealand owned so had a real incentive not to force sales. That’s clearly not the same now!

    • Keith Woodford says:

      I think the banks are already more cautious about forcing sales than they were six months ago. I expect they will be suggesting behind the scenes to Governemnt that there should be a lift in the allowable percentage of ownership that is foreign owned.
      KeithW

  2. James says:

    Do you think there will be an increase in restructuring arrangements with non-corporate-type farmers with the bank taking a haircut when the Farm Debt Restructuring Act 2019 comes into force or more of the same?

  3. James says:

    Do you think there will be an increase in restructuring arrangements with non-corporate-type farmers with the bank taking a haircut when the Farm Debt Mediation Act 2019 comes into force or more of the same?

    • Keith Woodford says:

      james,
      Yes, that is one scenario. But so far to the best of my knowledge it is only happening with some special-case corporates.
      KeithW

  4. anderson says:

    If you thought we had corporate farming – Don’t get too complacent
    Macquarie Bank is looking to pump billions into farms
    https://www.smh.com.au/business/banking-and-finance/why-macquarie-is-looking-to-pump-billions-into-farms-20191219-p53lgg.html

    • David Porter says:

      Interesting! Private Eye, a British satirical magazine call Macquarie “The Great Vampire Kangaroo”, an unflattering reference to the “Great Vampire Squid” name of the American bank, Goldman Sachs, because of their alleged unscrupulous dealings over the years.

      It always amazes me that a city investor would want to invest in notoriously overpriced and under returning farmland. I can understand it if they were either:
      1. Lending money to farmers who have traditionally been a good bet in that they have sufficient equity and generally make their payments.
      2. Thinking that the land price is going to fall dramatically and they can sweep up when it is at (or near) the bottom as they have piles of cash.
      One thing is for sure, they certainly aren’t doing it to feed the world!

      • anderson says:

        I’m not interested in the right or wrong – I’m too long in the tooth now – but I do listen to the chatter – just alerting you to what is happening – This is a long game …… Macquarie make their oewn luck – If those local NZ clowns Brierley, Ariadne, Equiticorp, Judge Corp had survived it is suggested that they would be in the midst of the coming agglomeration

        February 2007
        MACQUARIE Bank, the bank that ate Sydney, has set its sights on the drought-stricken bush, buying up precious water rights from struggling farmers. Macquarie Agribusiness, set up three years ago, is in the midst of a buying spree, relieving farmers along the River Murray of their permanent water rights

        https://www.dailytelegraph.com.au/news/nsw/mac-bank-buying-up-water/news-story/dd0f1f444880c294bbe6b23a31768414

        On accumulating sufficient water rights along the Murray River System they become the dominant player

  5. anderson says:

    Macquarie Bank will arrive – fully cashed up – with deep pockets – no borrowing needed

    • David Porter says:

      I’m pretty long in the tooth myself but don’t like the look of entrants like Macquarie. It is of course the complete right of landowners to sell to whomever they wish (subject to OIO etc.) but it will change farming as we know it.
      Very interesting re the water rights. I don’t think they are the same place (please forgive my poor Australian geography knowledge) but it looks like the same thing is going on here

      Dairy farmers have to watch a river flow (and overflow) past them to let the water get to new almond plantations way downstream. Am I sympathetic? If they sold their water rights, not really, but the wait of water in a place like Australia is criminal.

  6. anderson says:

    Post Card from my man on the ground in Kyabram in Northern Victoria

    Another substantial change in Victoria was a few years back water was separated from the land for the first time ever, meaning farmers that held historical water rights could now sell the water as a separate item. Where in the past water could only be sold as an attachment to the land. Hence the farmers needing a bit of cash sold off the water. With natural population growth and only “X” amount of water it was obvious water was a good long term investment and farmers were approached to sell their water and it wasn’t long and the water right became more valuable than the land and holdings. It may surprise you that the largest water holders in Victoria are the New York Fire fighters super fund and a Canadian Super Fund and a consortium headed by Eddie McGuire. Short story a mega litre of permanent water is now worth $7000 that was worth $2000 a few years back. Because of the price it has made it unviable for farmers to continue if they have to purchase water for operational reasons, the normal summer practice, and dairy farmers in particular have exited on mass. Once that was all green around us is now all bare and tinder dry and so many 3 generation dairy farming families are no more. It is a time in history.

    One thing leads to another and the irrigation water system you viewed several years ago is being consolidated as it is no longer viable to maintain, and to add to the farming nightmare the remaining farmers have significantly higher access fees as the structure costs are being amortised over fewer and fewer users. There are several government strategies in place trying to resolve the water conundrum but the speed of change in the market place is far quicker than policy introduction that has been often obsolete to date prior to implementation. The once lush Goulburn Valley is heading to dust bowl.

  7. anderson says:

    Post Card from Kyabram in Northern Victoria

    Another substantial change in Victoria was a few years back water was separated from the land for the first time ever, meaning farmers that held historical water rights could now sell the water as a separate item. Where in the past water could only be sold as an attachment to the land. Hence the farmers needing a bit of cash sold off the water. With natural population growth and only “X” amount of water it was obvious water was a good long term investment and farmers were approached to sell their water and it wasn’t long and the water right became more valuable than the land and holdings. It may surprise you that the largest water holders in Victoria are the New York Fire fighters super fund and a Canadian Super Fund and a consortium headed by Eddie McGuire. Short story a mega litre of permanent water is now worth $7000 that was worth $2000 a few years back. Because of the price it has made it unviable for farmers to continue if they have to purchase water for operational reasons, the normal summer practice, and dairy farmers in particular have exited on mass. Once that was all green around us is now all bare and tinder dry and so many 3 generation dairy farming families are no more. It is a time in history.

    One thing leads to another and the water system you viewed several years ago is being consolidated as it is no longer viable to maintain, and to add to the farming nightmare the remaining farmers have significantly higher access fees as the structure costs are being amortised over fewer and fewer users. There are several government strategies in place trying to resolve the water conundrum but the speed of change in the market place is far quicker than policy introduction that has been often obsolete to date prior to implementation. The once lush Goulburn Valley is heading to dust bowl.

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