Is NZ Dairying Losing it’s Way?

Having just returned from a three-week study tour to NZ dairy farms, I was surprised at the amount of supplementary feeding being made of PK and maize to spring calving cows to boost production per cow, especially as there was an abundance of grass about.

NZ farmers have had a difficult 2017 weather-wise, experiencing a drought following a very wet spring.  This followed two low milk price years 2015-16.  Coupled with increased environmental restrictions and no new consents (licences) to convert farms to dairying, peak cow numbers have been reached with little scope to expand.  NZ dairying is heavily borrowed with $41bn of which $6bn extra was borrowed in the downturn.

Now the five main banks (four Australian owned), want the $6bn repaid.  Most Agri lending in NZ is interest only with very little debt repaid.  Land value appreciation of 5-6% per annum over the past 20 years has reduced the need to repay.

As cost of production increases (due to increased supplementation) with a proliferation of feed pads, silage pits, effluent stores and more machinery, farms are just coping with bank pressure to repay debt on a milk price of 26ppl (standard litre).  The concern is that with downward pressure on global milk prices and rising milk output due to a favourable spring, will the cash be there to service the debt as well as the increased production costs?

Record numbers of dairy farms are for sale as either distressed or disillusioned farmers have had enough.  We met three bankers on the trip and the financial/banking message was the same.  In one region with 1,000 dairy farms, there were 70 of them for sale plus more who would like to sell but dare not advertise publicly.  Most farmers are looking for high unobtainable prices as up to three years ago record prices were paid for land.  Some land deals recently have been done at 30% discount to the market asking prices.

A correction is required, as it is impossible for new entrants/sharemilkers to buy land at £15k per acre!  We visited some top 5% by profitability performing farms.  Invariably these were some of the simplest, grass focused low cost operators.  We saw a huge variation in systems and costs of production.  The very profitable still made profits in years when milk price was only 14ppl.  These resilient sustainable businesses are viewing the industry’s predicament with optimism and are continuing to pay down debt.

Two thirds of the 11,500 dairy farmers in NZ borrow money.  This equates to £3m per farmer or £135K in interest charges alone each per annum.  This is equivalent to 5ppl interest charge, assuming these two thirds of farmers produced double the average milk production of 1.35m litres per farm.
If dairy farm values fall, and margins are squeezed due to lower milk prices and higher production costs, some dairy farmers will catch a ‘severe cold’!

As NZ is a major dairy world exporter, lower production will mean less tradeable surplus milk on global markets and an opportunity for milk prices to be maintained or bounce back up.  Interesting times!

Contact Gerard at gerardfinnan@fcgagric.com for more information.

Posted in Dairy & Forage, Sherborne.