Higher OCR to make farming 'tougher'
Dairy farmers carrying average debt of $3 million will feel the prick of rising interest rates, Federated Farmers president Bruce Wills says.
The official cash rate (OCR) rose 0.25 per cent yesterday to 3.25 per cent in the third lift this year.
Wills said the New Zealand OCR was one of the highest in the world and would push up interest rates. It also runs the risk of holding up an already strong NZ dollar.
He said the increase was an indication the economy was doing well and farmers supported price stability, but inflation was damaging for any business.
"This will make it tougher for farming," Wills said at the national fieldays at Mystery Creek.
"Another 0.25 basis points on $52 billion of debt - that is another big cost for the state of the farming community. Higher interest rates and a higher exchange rate are two economic issues that are key for farming."
Wills said many farmers had money in the bank and would do well from the higher interest rates, but other farmers would feel the pressure.
"The average debt figure for a dairy farmer in New Zealand is now a bit over $3m and most of that debt is in that top 10 per cent or 20 per cent, so there's a whole lot of dairy farmers out there with massive debt levels.
"I have been on record a number of occasions expressing deep concern in my view [about] the unsustainable debt level that our industry carries, particularly dairy, and $52b is unsustainable."
He said farmers were being reminded to carry some debt but to bring it down as much as possible during good payouts because weather, economic and offshore events could erode their profitability.
Today's benchmark for average debt is about $20 a kilogram of milk solids, almost three times the payout, and 20 years ago that was the top level for bankers lending money.
Wills said the drive to increase agriculture's value to $64b by 2025 would require the need for more intensification use of land.
"We are seeing increasing numbers of herd homes, cows indoors for various periods of time, particularly [in] Canterbury and Southland," he said.
"Why is that happening? It's in response to environmental concerns. It allows those farmers to continue to produce and run profitably dairy operations as far as the business goes. With the herd home you can control all your effluent."
He said herd homes seemed "counter-intuitive" because farmers were achieving a better environmental performance and remaining profitable by intensifying land use.
"This is one of the ironies that we face in agriculture today," he said.
"We have the Green Party politicians calling for the end of battery farming, the end of laying eggs in cages and the end of pigs in confined spaces but in the same breath they are screaming at the dairy industry to improve their environmental performance and to stop putting stuff in our waterways.
"One of the many options for farmers to confront their concern is to intensify and put animals in these factory-like systems, so I guess as I comment to these policy people - you have to be careful what you push for."
Farmers could concentrate cow effluent in the homes and place it on dry paddocks after it had been stored in large ponds. The other advantage was cows were kept warm during colder weather.
Wills said dairy farmers could expect more changes in the next 10 to 20 years with farming to become smarter, but the industry might not be as large as it was today as farmers moved to the most profitable farming.
Wills ends his three-year presidency on July 4.
He said he would leave the job satisfied the federation was in good shape.
He was proud of farmers facing up more openly to their environmental, water and animal welfare obligations and understanding they had to listen to their markets.