Debt surge a warning for farmers
High levels of farm debt could send up to 10 per cent of farmers to the wall in the event of a major drought, according to Federated Farmers president Bruce Wills.
"We have a very highly indebted rural sector, no question, particularly our dairy sector," Wills said in reaction to Reserve Bank figures which show agricultural debt has taken a sharp upturn in the first half of this year, sitting at the end of June at $48.3 billion.
The figures are particularly concerning because a new Farm Price Index developed by the Reserve Bank and the Real Estate Institute of NZ shows that farm prices have declined by 24.8 per cent from their peak in October 2008, while agricultural debt increased by 12.7 per cent over the same period (see chart).
A combination of high debt and falling land values could put pressure on farm balance sheets and is a particular concern because farm incomes have been falling due to lower commodity prices and the stubbornly high New Zealand dollar.
The latest Federated Farmers Farm Confidence survey showed a sharp decline in the number of farmers expecting to be able to reduce their debt levels over the next 12 months.
At the beginning of this year more than half of all farmers expected to be able to reduce debt over the following year, but by June that figure had dropped to under 40 per cent.
Wills said not all of the debt being taken on was bad, because some of it was being used to increase production by converting grazing land to dairying, which produced higher returns. But overall debt levels were too high.
"We now have higher rural debt levels than when the worldwide credit crunch hit in 2008, which is pretty concerning because we should have all got the message that we are carrying too much debt," he said.
Much of the debt was taken on during the dairy boom of the mid-2000s, which Wills likened to events leading up to the 1987 sharemarket crash.
"I think it stems from the rapid growth we had in dairying in the mid-2000s. There was a dairy boom then and some very easy credit and some guys went bananas and bought up extra units and chased economies of scale and bought at some pretty high land values. And they [land values] are back by 25 per cent now, so their equity position will be squeezed."
Wills said the dairy sector was carrying about $20 of debt for every kilogram of milksolids it produced, equivalent to $2.2 million of debt for a farm with average production of 110,000kg of milksolids a year.
But that was an average, and it was likely that much of the debt would be concentrated among perhaps 20 per cent of farmers, Wills said.
That would leave many of them vulnerable if low commodity prices continued and there was an adverse event such as drought.
"Eighty to 90 per cent of farmers will be absolutely fine with the commodity price softening and if it turns dry and we get an adverse weather event," he said. "But there's a bunch of farmers out there with a whole heap of debt who in my view won't make it.
"This debt situation got a fair bit of attention about 18 months ago, and then we had that wonderful 12 months of high commodity prices, thank goodness, so it got forgotten about.
"But my view is that this debt in rural New Zealand is the elephant in the room."
Farmers only need to look to the wine industry to see how quickly bad weather can affect rural fortunes.
The viticultural sector also went through a debt-fuelled binge in the mid-2000s which had been followed by a sharp fall in vineyard prices, putting many grape growers' balance sheets under severe pressure.
A poor summer in 2011-12, which led to a near 25 per cent drop in this year's grape harvest, was the final straw for many, prompting a fresh round of receiverships and mortgagee sales.
However, there are some bright spots, such as continuing low interest rates and the severe drought in the United States, although the latter could be a mixed blessing for New Zealand farmers.
The drought was likely to cause American farmers to cull their herds, resulting in a fall in US beef prices. Because the US is this country's largest beef export market, a fall in prices there would also reduce NZ cattle farmers' incomes.
However the drought could also see a sustained fall in US dairy and grain production and a subsequent rise in international dairy and grain prices, lifting returns to Kiwi dairy farmers.
CAVEAT ON CRAFAR FARMS
The Goverment has moved to protect the sale of the Crafar farms in the central North Island to a Chinese buyer by placing caveats on the properties.
In an unusual move, the Registrar-General of Land has placed caveats on the Crafar farms' land titles "for the prevention of fraud or improper dealing".
That would prevent any transfer of the titles or registration of any interests such as a mortgage, lease or other encumbrance on them, without the permission of the registrar-general or an order of the High Court.
The farms' receiver Brendon Gibson of KordaMentha said he had requested the caveats be put in place to prevent any interference in the sales process.
That followed an attempt by Crafar family interests, who still technically own the properties, to stymie their sale by arranging to sell them for $16 and attempting to transfer their ownership to a woman who has since been bankrupted.
That "sale" was quashed by the High Court last month.
- © Fairfax NZ News
Will farmer-driven meat reforms work?Related story: Market dominance not meat industry answer