The biggest threat to their existence this year comes not from environmental extremists getting their way but from the men in suits controlling the cashflow.
They’ve suddenly got a dose of the jitters after repeated warnings, going back several years, from the Reserve Bank about its concerns over the level of rural debt, particularly money borrowed by dairy farmers.
The signs were clear to the banks and to farmers the banks wasn’t going to put up with it indefinitely.
What brought matters to a head was the Reserve Bank’s move to make the mostly Australian-owned trading banks double the cash reserve they hold to balance the ride if the journey goes off the straight and narrow and veers into rocky ground.
Those banks and their Australian masters, who are also on the naughty chair at home, aren’t keen on that so their solution is to get tough with the farmers and require them to pay off more principal as well as interest so they can limit the amount of cash reserves they have to hold.
They’ve made statements about not selling off, or selling out, their farmer customers as other lenders start to circle. Those lenders want to buy debt, at a discount of course, from the banks. They then have various ways of getting their money back and if they buy the debt at a discount they don’t have to get all of what’s owed to make a profit. That means forcing a sale of a farm for less than it owes on paper, isn’t necessarily a loss-making job for them. It leaves less, if anything for the farmer, but all the guys in suits are happy.
And they generally charge higher interest, and make greater margins, than the trading banks because they consider they are taking a bigger risk. But with their high interest and get in and out quick philosophy dealing with them is also a risk for farmers and, therefore, the dairy industry.
There is talk of other, local parties getting together to offer finance packages to farmers the trading banks don’t want but so far nothing concrete is visible.
That raises questions about the banking system.
Do we need a rural bank set up to specifically guarantee the future of our agricultural export sector?
Or could the Government push Kiwibank into becoming the saviour of the rural sector? It would probably need a push because it has so far shown no desire to be a major player in the rural lending business.
Or will the dairy companies come to the rescue?
Remember, they have a vested interest in farmers’ survival. They need the milk.
In fact, the world needs the milk. Australia’s dairy industry is chaotic, American farmers are being left without milk buyers as big companies get into trouble and who knows what might happen in Britain and Europe. And commentators are predicting steadily rising prices on global commodity markets as demand continues to expand while supply fails to keep up.
Those steadily rising prices also present something for Fonterra to ponder. As part of its reset the next item on the agenda is its capital structure.
Fonterra seems more sensitive to a high farmgate milk price than other companies, even though it sets the industry standard.
It has now to consider how it will set itself up for a future in which its suppliers are being squeezed by forces outside their and its control when it is also trying to stem the outward flow of its share of the nation’s milk production.
It needs the milk but is in no position to put the hard word on farmers who have already made it clear they don’t want even a cent of their milk money going into putting the co-op on a stronger footing.
That leaves the part of Fonterra that buys milk from the part of Fonterra that collects the milk paying a price that going by past results is too high. Will this strengthen the case for setting up New Zealand Milk Products as a separate, wholly or partly owned subsidiary of the co-op. It might work if the co-op and company have separate boards and management so they are independent but that’s another can of worms – not the least of which is people fearing a loss of empire and the removal of their ability to rob Peter to pay Paul.
However, in that respect it might resolve the issue of attracting investors. Shareholders can remain in the co-op and they can be limited to farmer-suppliers while share market investors could be sold shares in the company. That way farmers would continue to get their milk price, and maybe a dividend, from the co-op while the company could simply pay a dividend to all its shareholders, including the co-op.
