Compared to other countries New Zealand had a very high debt level on its dairy farms, Hoggard said at the dairy industry group’s annual meeting today.
He said there were several factors around this including in many cases farmers in other countries being unable to expand because of regulations and therefore having a reduced need to borrow. Or they may have had volatility from other factors, such as weather in Australia that meant they focused on management and took on less debt.
“Whether it’s a conscious decision or just an inbuilt setting that no one has considered and [which] just occurs, I can’t tell you. But the facts are they have less debt.”
In 2015 NZ’s dairy industry debt stood at $37.8 billion, up from $30b five years ago.
Hoggard said the industry had been able to handle higher debt levels because returns had been good and weather conditions were by-and-large favourable, which allowed farmers to take more risk in other parts of their business.
“Is this current downturn just a blip or are we entering a new period?” he asked.
"Things might look slightly different than the last decade and our risk profile might be slightly different than the last decade.”
The latest Reserve Bank Financial Stability report shows that low milk prices have continued to put the dairy sector under material stress with bank lending to farmers increasing by more than 9% in the year to March, as troubled farmers have borrowed to meet working capital requirements.
The report said debt relative to trend income had increased significantly and was likely to exceed its previous peak of 350% if incomes remained subdued and indebtedness continued to rise.
Dairy sector borrowing is expected to rise further in coming months as farm incomes fall during winter. Many farmers now face a third season of negative cashflow.
Problem-loan levels are expected to increase significantly over the coming year, although losses in the banking sector are likely to be absorbed mainly with profits, the report said.
Some heavily indebted farms with high breakeven payouts may face tighter constraints on their borrowing capacity and pressure to reduce costs further, it said.
“Is this current downturn just a blip or are we entering a new period?”
Andrew Hoggard
Federated Farmers Dairy
In a recent Reserve Bank stress test of bank dairy portfolios, under the most severe scenario banks reported they expected to resolve about a quarter of dairy loans through some form of forced sale that would lead to further downward pressure on farm values, which have dropped 13% in the past year.
Hoggard said it was up in the air as to what the fallout for New Zealand dairy might be from Brexit, given this country’s dairy exports to the United Kingdom were pretty minimal.
“Whilst we have quota, the tariff rates do make it uncompetitive against cheaper imports from Ireland and the Netherlands.
“If we are able to quickly organise trading terms with the UK that are at the same level as the EU, then we certainly have a good opportunity,” he said.
Under World Trade Organisation rules existing agreed access can’t be downgraded.
On the downside, NZ had lost an ally around the European Union table in negotiating a free-trade agreement with the EU and the global uncertainty may have a negative effect on demand, he said.
Hoggard also waded into the debate on the swimmability of NZ’s rivers “just to keep the keyboard warriors happy”.
He said the discussion focused on irrigated dairy farms being the reason why so few of NZ’s waterways were swimmable but never mentioned other causes. In his opinion the focus needs to be on defining “swimmable” or what the actual factors influencing swimmability in each waterway were.
Hoggard said E. coli levels should be the focus if the key issue was to avoid illness when swimming in a waterway. However, the discussion seemed to indicate “we’re all going to die from nitrogen poisoning”, he said.
“Dairy farming cops a lot of blame for everything but on the E. coli front I think we have already done heaps to reduce the impact.”
Hoggard said that in his own region, the Manawatu River had 51 monitoring sites and only one of them had registered an E. coli count of more than 550 – which requires action – and that was at the Woodville sewage treatment plant.
