Friday, March 29, 2024

Upturn appearing on the horizon

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Farmers who reckon dairy’s woes are as bad as during the Rogernomics era either have short memories or weren’t there according to accountant John Falloon and Farmers Weekly reporter Neal Wallace. Falloon compares the factors involved then and now and Wallace, who wrote a book on the impact of politically-induced hardship in the 1980s, says lessons learned then are applicable now. Economic difficulties facing farmers now are as bad as they can get but not the worst, Canterbury farm business accountant John Falloon says. While there was a suggestion the latest farming climate was similar to that of the 1987 farming struggles, Falloon did not agree.
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“It’s not the same by a long stretch.

“In 1987 we had interest rates at 18-22%, we had severe drought periods through much of the 80s but we had subsidies coming off too.

“The saving grace this time being interest rates, down dramatically. At least you can borrow money with a four in front. That’s not been seen in 50-plus years.

“So we are far from the same as the 80s,” Falloon said.

He indicated the economic difficulties today were not the fault of the Government but of oversupply of product and failure of the industry to read the tea leaves well enough to give farmers accurate signals for the value of their products.

Increasing farmer-to-farmer business transactions with grazing and feed contracts had overflowed dairying’s challenges to other sectors and recovery was being complicated by the industry’s slowness to react.

What started with a dairy crisis was now having a major impact on the arable sector with crops down $100 a tonne.

“That knocked 25-30% of gross income for cropping farmers,” Falloon said.

“Not only have prices slumped, feed crops are sitting unsold and that puts pressure on other crops traditionally grown.

“There are a lot of cropping farmers looking for options and it looks like there could be a good chunk of ground that will remain fallow over the winter as they wait for spring to make all their decisions.”

Sheep and beef farmers were not affected as much.

“Beef is doing quite well and sheep are just going through the normal cycles that sheep farming goes through,” Falloon said.

While not so brave as to predict when farming fortunes would turn, Falloon was a little optimistic.

“Personally, I feel we will see some upturn sooner rather later and there will be more upside for dairy than cropping.

“Dairy farmers have got to drive costs below $3.50 and if they can do that, depending on their level of debt, they will survive.”

“The saving grace this time being interest rates, down dramatically, at least you can borrow money with a four in front, that’s not been seen in 50-plus years.”

John Falloon

Accountant

 

For cropping farmers, it would depend on whether dairy farmers stuck with their forced low-cost system or went back to how they were farming three years ago.

Options for cropping were very much demand-driven and farmers had to adapt accordingly, Falloon said.

It was not easy being a farmer at the moment, Beef + Lamb New Zealand’s northern South Island farmer director Phil Smith said.

The drop in the dairy payout, further reductions in lamb prices and hot weather sucking any remaining moisture out of the ground made it hard to remain positive.

“When prices are high it’s hard to ever see them dropping and when low it’s hard to see them rising,” he said.

Farming in a small country meant NZ farmers didn’t have the luxury of a large domestic market for their produce.

“As 90% of our lamb and 80% of our beef is exported we are at the mercy of global markets.” he said.

The slump in dairy prices was caused by oversupply and, similarly, with lamb, supply was up while demand was diminishing.

But experience had taught that markets could change quickly.

“It would only take further falls in the NZ dollar to help market returns. Think back to 2001 when the NZ dollar was at 42 cents against the American dollar and lamb was worth $75 to the farmer.

“Our forefathers were no strangers to the cyclical nature of farming and neither are we.

“While many things change, some things just stay the same,” Smith said.

Chicago-based commodities specialist Brian Rice told dairy farmers at Fonterra Shareholders' Council meetings he was convinced the sector had a bright future despite the struggle with overproduction, particularly from the European Union.

There was more upside risk than downside risk for dairy with the factors that produced the “white gold” days of 2013-14 still there.

In the big picture, on a multi-year timeframe, production would slow down a bit and demand from places like Russia and China would kick back in.

“It is possible that could happen by the end of 2016 but I don’t think that we will get an uptick in the next couple of months,” Rice said.

Relevant story: OPINION – Lessons of 1980s relevant now

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