Tough times, debt danger

TOUGH TIMES: A drop in income across all farming sectors will make the 2012-2013 season challenging.
TOUGH TIMES: A drop in income across all farming sectors will make the 2012-2013 season challenging.

A drop in income across all farming sectors will make the 2012-2013 season challenging, however experts say it's not all doom and gloom

The country was in the midst of a serious downturn in farm returns for both meat and dairy farmers, Westpac chief economist Dominick Stephens says.

This was reflected in a new report just released by the Ministry of Primary Industries, which predicted a 20 per cent drop in total income for dairy farmers.

This would result in a drop in profit before tax of around 57 per cent compared with 2011-2012.

Sheep and beef income was expected to be down 6 per cent in 2012-2013 due to lower returns for lambs and wool.

"It's a fairly serious downturn in incomes," Stephens said.

What would soften the blow for farmers was that production levels were up. Milk solid production had grown 5 per cent so far this season while most sheep farmers had reported good lamb crops.

Businesses carrying high levels of debt were particularly vulnerable.

Rural debt was currently sitting around $49 billion, but most of the debt was concentrated on a small number of farms.

"What I understand is that it's a lot of the bigger, newer dairy farms that are heavily indebted. They are the newer conversions of five to seven years."

This was concentrated debt and the sector had done a lot to reduce debt levels over the past year.

"I wouldn't be surprised if there were a number of farms that did really struggle under heavy debt loadings and lower returns this year."

Many of these farms could have been buoyed by the higher returns over the past few seasons and they may struggle, he said.

Many farmers believed they were in for a poor year, but the outlook remained strong over the medium term, he said.

"You're seeing that in the rural property market. Sales are down a bit but I don't think prices are particularly falling. If anything they might be rising slightly."

Act Three Rural Insolvency and Investigations head Dennis Wood predicted more rural businesses would face going to the wall in the next 12 months as farms went into receivership and were sold off.

Since early 2011, there have been at least 50 rural receiverships and since the beginning of the global financial crisis around 200 receivership appointments.

That did not include the huge number of rural businesses that had voluntarily been wound up, liquidated or were the subject of mortgagee sales.

Rural receivership numbers would keep pace with rising rural bank debt.

Dairy farms made up the highest proportion of those farms that had gone into receivership, he said.

"There had been a variety of receiverships across the whole sector including orchards, vineyards, sheep and beef, but dairy's the main one."

He stressed it was still a small number of farms that were in trouble. Ninety per cent of farmers would be fine.

"There are 11,500 dairy farms in New Zealand and we're talking about a handful of those," he said.

The situation was not as dire as some had predicted, Federated Farmers president Bruce Wills said.

"Will some farm businesses fail as a result of lower payouts and a high dollar? Sadly, that answer is probably yes.

"Look, this is a tough season and make no bones about it. Yet tough does not mean dire because we produce food and fibre the world needs."

On the positive side, five of the past six GlobalDairyTrade auctions had been up and in the latest auction wholemilk powder jumped 9.2 per cent.

"This comes off an excellent production start to the new season. I have read that milk volumes are up 13 per cent on last year and last season was one out of the box. I can say from my farm we currently have excellent growing conditions for beef and lamb too."

Farmers needed to look past the short term because the medium term remained bright, he said.

The Timaru Herald