Declining dairy assets, high debt and land-use change

In recent weeks I have been writing about dairy-farm debt and declining asset values. In this article I pose the question as to whether or not we can expect to see a significant number of dairy farms convert to other land-uses as the pincer between land values and debt takes its toll.

The simple answer is that it is only going to be farms on either marginal dairy land or on potential horticultural land where, at least in the short-run, there will be significant land-use change. Apart from horticultural options in very specific areas, the economics do not favour a big change of land-use. On most classes of dairy farm, values would need to drop a lot further before sheep and beef cattle raising would come into play.

This is because dairying is inherently more profitable than sheep and beef, and this is the way it has been for the last fifty years on most of the better-quality land. However, there are exceptions, particularly at latitudinal extremities in both north and south. More of that later.

As for cropping options that are not horticultural, these are largely restricted to the better soils in the east coast regions from Hawkes Bay down to North Otago. Many of these better soils are already predominantly in cropping, and existing cropping farmers are already scratching their heads in search of new and more profitable crops on these lands. Cash cropping is always challenging in the New Zealand climatic and economic environment.

The latest DairyNZ statistics show that in 2018/19 dairy farm numbers decreased by around two percent. However, existing dairy farms increased their cow numbers by about one percent and production per cow also increased by about one percent. This left total production unchanged.

Many of the farmers that have left the dairy industry appear to be older small-scale farmers who have stayed farming but stepped back to dry-stock operations. These tend to be farmers who, because they have not expanded in the past, have low debt. In some cases, they either already have or soon will have a pension to supplement their farm income. The bottom line is that it was not debt that caused them to change land-use. Rather, it was a wish to simplify late-career lifestyles on these smaller properties and reduce compliance hassles.

The evidence that I can see suggests that where dairy farmers have actually sold land, then in most cases, as has been the situation for many years, that land went to an existing dairy farmer. This is why the size of farms keeps creeping up. The only difference now is that with so few buyers in the market, the average herd size is only increasing at around one percent instead of four percent each year.

The specifics of the situation are playing out and will continue to play out differently across the country. In Northland, the soils that are suitable for subtropical fruit growing are well recognised and most of these are already in some form of horticulture or clearly identified to go that way in the future. If an existing farmer has to sell such land because of debt pressure, then it may speed up the process, but nothing more.

Dairying has always been challenging in Northland. The cows tend to stress with summer heat and humidity, maintaining feed quality is challenging, per cow production is almost always lower than elsewhere in the country, and per hectare production is also lower than elsewhere apart from the West Coast of the South Island. For those who wish to sell, the challenge will be to find a buyer. This is the region of the country where dairy economics and beef economics are closest.

In much of the Waikato, it makes no sense for either existing farmers or new farmers to change the land-use from dairy. Kiwifruit, fresh vegetables, milking goats and milking sheep are all candidates for expansion, but the impact will be modest in the overall scheme of things.

There are many well-established Waikato dairy farmers who would still like to grow their Waikato dairy businesses, but to do so they have to extract their investor equity from South Island corporate-type farms. Currently, that is not an option.

Taranaki is different again. Alternative land-uses are few and far between for this high rainfall country. Some Taranaki farmers would undoubtedly still be interested in expanding their businesses but most have no hope of doing so with current lending criteria. According to DairyNZ data from 55 Taranaki survey farms, the Taranaki debts average $35 per kg Milksolids (fat plus protein) and these are the highest average-debt levels per kg Milksolids in the country. For these high-debt Taranaki farmers, changing land-use is definitely no solution. Taranaki farmers are less likely than Waikato farmers to have South Island dairy investments.

The South Island has three distinct dairy regions. These are West Coast plus Nelson/Marlborough, Canterbury/North Otago, and Southland/South Otago.

West Coast plus Nelson/Marlborough farms had the highest average debt in 2018 at 65 percent of assets. Many West Coast farmers would have been in an impossible situation if it were not for Yili coming in and buying the co-operative shares at a big premium, and also guaranteeing Fonterra’s milk price as the minimum price. Nevertheless, there are many West Coast farms still in trouble. Some farms are more than a little rundown and I can see some of these going back to beef with new owners. This will require existing farmers to sell up and the bank to take a shave on their loan book.

Canterbury farmers are in a stronger position than Westland in regard to debt, but many are seeing big clouds looming with environmental restrictions. I am optimistic that there are technologies to solve those problems but they require more investment. Right now, there is no mood for that.

Alternative land-use options for Canterbury are less than is widely perceived, at least by urban folk. Much of the Canterbury dairy industry is on soils such as Lismores and Eyres that have no potential for cropping. As for crops such as wheat, these are possible on the better soils within a rotation, but the economics are not attractive. A shift from dairy to other land-uses will require higher value specialist crops which existing crop farmers are struggling to find.

South Otago and Southland are different again. Here the debt levels are particularly high, probably now averaging around 70 percent of value, but with no current floor to those values on the marginal land. Given the challenges of outside-cow wintering in this region, it is easy to see farms on the hills and also some of the flats going back to sheep under new owners. Onace again, the banks will have to take a shave to get some of these sales across the line.

The big picture message across New Zealand can be summarised as being that dairying remains the most economic land-use on most existing dairy land. The caveat is that environmental restrictions could change all of that. If that does happen, then many farmers will be left with nothing after the bank has been repaid. Finding alternative land uses is challenging.

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, Meat Industry, Rural Finance. Bookmark the permalink.

8 Responses to Declining dairy assets, high debt and land-use change

  1. frenchbruce says:

    Hi Keith,
    Can you explain the logic that sees milk being trucked all the way from Auckland to be delivered to South Island supermarkets??
    Bruce Whitfield

    • Keith Woodford says:

      Only that I think we can be confident that both Fonterra and Goodman Fielder will have done their sums.
      I am aware of specialty milks being transported between the North and South Islands but I don’t have specific information for other categories of milk.

      • frenchbruce says:

        Hi Keith, we run a small hotel and use a lot of milk. From time to time we encounter milk that goes rotten and coagulates very quickly under certain conditions. Our enquiries with the supermarkets where we purchase the milk is that it all comes from Auckland.
        I would be more than interested to see how both companies can justify their carbon emissions with mileage involved…as well as a breakdown of the costs of producing milk in AK and transporting it all the way to ChCh.

      • Keith Woodford says:

        Thanks frenchbruce,
        Both Fonterra and Goodman Fielder, and now Synlait, have Canterbury fresh milk operations servicing the South island, but I don’t know where Nelson and Marlborough get their milk from. All ofthe A2 milk currently comes from the North Island

  2. David Porter says:

    Thanks again Keith. I find that the overall situation with regard to anything like this paints a false picture and with farm debt it’s always a farm specific issue. There are a large number of farmers out there with only a bit of seasonal finance or even no debt at all.
    I know I’m sort of repeating myself here from last time but do you not think that the banks will just try to ride it out for a few years until land values rises again in value, i.e. just inflate away the debt? There will be some sell-offs with the most difficult cases but, because the banks have most to lose (apart from the individuals sold up) I think they’ll go easy on compulsory sales as they won’t want to force the downward revaluation issue. This is because of exactly what you say here, there is nobody waiting to pick up all of this land unless there is a major revaluation and the banks will end up with a haircut down to their necks if that happens!
    I know they’re trying to get all loans on to repayment but some will probably have to stay on interest only for a while yet as that is the only way that the bank has a chance of any otherwise profitable farmer staying above water.
    The only other problem on the horizon is that we must be due a cyclical “correction” in milk price in the next couple of years. Things like coronavirus and the ever talked about world recession might cause a drop in confidence sufficient to drop the demand for dairy products although we haven’t seen that yet. On top of the debt, I hope we don’t!

    • Keith Woodford says:

      I think it makes sense for the banks to try and ride it out. However, it seems that some banks are trying to get some farms which show as impaired assets off their books, even if this means taking the impairment as cash, in a desire to simply get those farms off the books.

  3. Dave Buck says:

    Mr. Woodford,

    Greetings from Minnesota, USA. Four years ago we visited New Zealand on a dairy tour and since have taken a large interest in how things are in your country. I always enjoy reading the posts you send out. In a recent post about debt per kilogram of solids I assume this means butterfat, protein and other solids. We sell about 1700 lbs or 772 kilograms of solids per cow. Based on your estimate of $21.50 debt per kilogram solids and allowing for an exchange rate of .64 this would equal $13.76 American or $10,622 per cow for us. If my numbers and logic are incorrect please let me know. This would be a staggering amount of debt for a US dairy and make it very difficult to compete locally.

    Keep those posts coming.

    Thank you,

    David Buck

    Goodhue Mn

    • Keith Woodford says:

      Yes, I recall meeting you and your wife.
      In New Zealand and also a considerable number of other countries we use the term ‘Milksolids’ to denote fat plus protein. This is indeed very confusing because it does not include total solids; i.e. lactose and minerals are not included. Sometimes it is written with a capital ‘M’ and often the abbreviation of MS is also written in capitals to signify it is indeed only fat plus protein. But in NZ, even when written with lower case it is only fat plus protein. You are not the first to be confused by this crazy system!!
      If I convert the NZ milksolids to kg of milk, and then convert that to lbs (which we stopped using in NZ when we went metric in around 1967), and convert the NZ dairy debt of around $41 billion to US dollars at the rate of 0.64, then I come up with a debt of $US55c per lb of milk. if we assume a US cow produces 22,000 lb of milk – then yes, this is close to $US 12,000 per cow. But there is a flaw in this calculation done this way because it is not taking acocunt of the fact that each of these lbs of milk is higher in components than is the case in America.
      You say that your cows do 1700lbs of solids but I wonder if this too is actually fat plus protein – what I think you Americans refer to as ‘components’. If I do the calculation on that basis that way then I come up with a figure of $US10,620 per cow.
      If I do the calculation on the basis of an American cow producing 22000 lb of milk at a components of 6.5% then it comes out at about $US8900 per cow.

      Doing these calculations always depends on specific assumptions and hence the variation. And it gets complicated because American cows produce a lot more litres but with lower components than NZ cows. But the key message remains the same, that dairy debt in NZ is very high.
      In interpeting these figures, it is important to note that NZ farmers typically produce almost all of their feed on land that they own, and that the cow collects this feed herself by going out to pasture. Hence feed costs are modest compared to the US.
      But you are right, it is a very high level of debt and it makes NZ dairying very susceptible to any increase in interest rates or alternatively to a decline in dairy prices.
      Keith W

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