Taking a shot at NZ farming's next seven years
Can we really forecast accurately what might happen with agriculture over the next, say, seven years and what the key issues may be for New Zealanders?
The answer is no, but in honour of Nostradamus and other great crystal bowl devotees let's take a shot at what lies ahead.
Over the next two columns I will lay out 26 points for farmers and others to mull over. Who knows, 70 per cent of them might come to pass in some shape or other.
1 - There will be more volatility in the next seven years than there has been in the past seven on all fronts. You must include this, and cope with this, in your business plans.
2 - The importance of Fonterra for New Zealand will increase - it is important now but expect a further increase.
3 - What is the biggest risk with New Zealand exports? That would be a major hiccup with Fonterra's brand.
4 - What would I estimate New Zealand total sheep numbers to be in seven years? The national flock will probably be 26 to 28 million and lower than the present figure of about 31 million. Why? Because the average dairy farmer at present grosses just on 10 times as much per hectare as the average sheep and beef farmer. You cannot expect farming and farmers to continue with this statistic if they have workable options - mainly irrigation water - to change either in whole or in part.
5 - Within 10 years farmers will need a licence to farm and a licence to apply certain fertilisers. It may be described as something quite different or something sounding quite passive, but a licence or a warrant of fitness is what it will be.
6 - Farming is definitely going to get more complicated in all sorts of ways from a combination of councils, the Inland Revenue Department, government regulations and environmental, ACC, employment, GST, marketing and fertiliser issues. Don't fight this and don't waste time attributing blame. Get your administration and your mind on top of this because the potential penalties will be frightening.
7 - Don't draw major future conclusions from the top 10 per cent or bottom 10 per cent of operators in every industry. The top 10 per cent will always break the mould and the bottom 10 per cent have long ago sold the mould. The long-term cornerstone operators in every industry are that middle 80 per cent block. This is the group that is effectively the future and will respond positively to good advice, technology and government. Don't waste time thinking you will pull the bottom 25 per cent group up to the top 25 per cent group. That won't happen and your better option is lifting the tide so the whole 80 per cent block all rise.
8 - There is going to be more major issues about water. There will be wars around the world relating to water. Agriculture is still absorbing about 70 per cent of many countries' water supplies and areas like the state of California are already under real pressure.
9 - There will be more realisation and negotiations that the value of water - whether for urban, rural or industrial use - must be charged out, allocated or paid for at something much nearer the current market value than the existing situation where agricultural irrigation water (the major user - is often charged out on some low-cost historic equation basis. This means the true value of water around the world is significantly undervalued.
10 - Nail down your water rights easements, water consents, irrigation rights and the like. Don't procrastinate in this area - face the cost and get it done legally, done well and done now.
11 - Under the current dairying scene it looks as though it will take the United States and Europe probably two full years (after May 31 - before they can crank up their own milk supplies significantly and get some of the benefit of the higher worldwide milk demand and payouts. After that the increase in interest rates and the increase in farm working expenses coupled with a lower overall New Zealand milk solids payout will subdue the dairy farmers' current very sound profitability.
12 - The overall cost of production for average dairy owner operators with 800 to 900 cows is likely to rise again for the year ending May 31, 2015. Farm working expenses would be about $4.30 a kilogram of milksolids, interest and/or rent $1.50kg/ms and the actual cost of depreciation for vehicles, plant, irrigation and cowshed about $0.30kg/ms. That works out to be a total of $6.10kg/ms. Add to this personal drawings of $0.23kg/ms and the suggested total excluding income tax, any capital expenditure and term debt reduction would be $6.33kg/ms.
13 - Equally, I would guess the overall cost of production will also be much higher for hill country sheep and beef owner operators with about 7500 stock units for the year ending June 30, 2015. Farm working expenses could be $60 a stock unit (su -, interest and/or rent $14/su and the actual cost each year for depreciation for vehicles, plant and other equipment $6.50/su. That amounts to $80.50/su with personal drawings another $7.75/su. The suggested total excluding income tax and any capital expenditure and any term debt reduction would be $88.25/su.
Food for thought? I will let you be the judge about the soundness of these predictions and only time will truly tell if they come to pass. In the meantime they will give farmers something to chew over until the column's next 13 points.
* Pita Alexander is a specialist farm accountant at Alexanders.