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With the rocketing up of the OCR this past week (up +0.75% to 4.25%) everybody’s interest rates are going to increase; farming is not being excluded.
Given that farming has worn the brunt of inflationary pressures so far, the additional increases in interest rates are going to be very unwelcome.
Looking at the agricultural sector as a group they have managed to constrain borrowing reasonably well in the last 5 or more years. Reasons for this no doubt vary across the various ag sectors but in the past, it was driven largely by dairy land purchases, conversions and increasing herd sizes with associated infrastructure. In the last five years or so herd numbers have decreased by about 5%
Source: DairyNZ
Cow numbers have also shown a decrease over the same period (2021 had a small lift no doubt driven by the record pay-outs). So, with dairy not in an expansionary mode ag borrowing has settled to a flat trend, unlike housing which has been driven by increasing costs.
Source: RBNZ
Sticking with dairy for the moment, back in May 2019 a Fed Farmers survey showed that farmers were paying on average 5.0% for loan monies. Looking at the interest.co.nz chart for “fixed 2 year term mortgage rates” they were 4.21% in March 2019 (Allowing for a lag due to survey compilation etc). The latest numbers are 6.094% (25th November). Prior to the latest Reserve Bank announcement, however, banks tend to preload in anticipation of increases although with predictions of more OCR rises to come this may prove conservative.
As the graph below shows, there has been a steady decrease in the amount of interest paid annually by dairy farmers. The last year found (2019/20) has $27,516 as the annual amount paid.
If some basic assumptions are made on the current rate and given rates were falling at the last Feds Farmers survey results then perhaps it is likely that the interest bill at next reviews will cost say 6.5% and will increase to around $35,770 or up by $7,800 annually. By itself most dairy farms could absorb this but coming on top of recent record-breaking inflation it is going to put a large dent in profits.
Fortunately over the sector, control on debt appears good and a major turnaround from the overheated days of 2016.
Rural debt
Select chart tabs
Using Beef and Lamb NZ data for inflation, (likely to be very similar to dairy) on-farm inflation for input prices used increased 10.2% in the year to March 2022, its highest level in almost 40 years. Of the 16 categories of inputs, prices increased for all but one (electricity). Expectations for 2022-23 are for a similar level on on-farm inflation. Fertiliser, lime and seeds expenditure, which is equivalent to 19.6% of total farm expenditure, increased 4.5% to an average $104,700 per farm. This follows a large 19.5% estimated increase in the previous season. For sheep and beef farms, farmers have reduced fertiliser volumes applied, per farm and per hectare, each season since 2018-19. The interest bill (Interest and Rent in B&LNZ data) is likely to increase from $66,950 by $20,000 if the same logic of lifting rates from 5% to 6.5% is used. As rent is included there is a ‘fudge factor’ here so suspect there is not going to be this jump but in an earlier article I did show sheep and beef have been borrowing at higher rates than their Dairy counterparts.
Whatever means are used, the combination of interest increases and inflationary pressures are going to reduce farm incomes significantly.
Beef and Lamb NZ are reasonably positive regarding beef prices next year with a +7% increase however, much of this is driven by the NZ$ vs US$ and some vulnerability here for rapid shifts. Sheep meats (less affected by the US$) are not so rosy with a -3.9% decline expected for lamb and -5.1% for mutton. Dairy are still looking at near record levels although a large degree of uncertainty here also.
Unfortunately for all businesses and sectors the additional costs in 2023 are pretty well assured whereas the income is not.
Another area of concern is the declining inputs of fertiliser. This has been also reported from the arable sector (both here and Australia) and while sheep and beef farms have always used fertiliser as a ‘discretionary expense tool’ given the good returns of late the declining use should be of concern. Soon, if not already there may be a reduction in productivity as these impacts start to be felt. A comment by Cameron Bagrie in the Farmers Weekly resonates “New Zealand’s economic base is being eroded. Export of goods volumes are below 2019 levels. NZ’s pastoral base is being eroded”. It’s not just with the tree conversions where this is starting to occur.
It is little wonder our current account deficit is turning sharply worse.
13 Comments
Farmers have been pushed to put productivity last for years now. It seems to be spreading more broadly into society where everyone seems to pushing 'aspirational' metrics rather than productive metrics. I've kinda given up trying to un-crazy people. I'm content to sit back and see where all this goes.
This is nothing new, in my 40yrs of farming these things just keep coming around. I tried farming hills without Fertilizer, waste of time and rather depressing. Now we put the Fert on regardless, even if it means we don't make much out of livestock every year.
Those farms with high debt are best to get out and let someone with more financial backing do the job.
My forebears arrived in NZ mid 19th century. My great grandfather was the first run holder on one of the Sth Island’s great stations. WW2 curtailed our family farming continuity. From my education, then working in finance, then in primary production, then back in finance, New Zealand became a nation founded on the production and supply of protein, food and for quite a while wool fibre as well. That history, the importance of that history, is completely lost on this government. The world still requires supply of safe, quality food and very much so. New Zealand is versed and equipped to fulfil that role. Why does New Zealand have a government that is hellbent on destroying that heritage, that function and that vital worth for our nation as a whole?
... I've never seen any government in this splendid land so polarizing as this lot ...
When loyalist Labour man Chris Trotter turns on them , you know 100 % that they've lost the plot ...
... I'm not anti-Labour , I vote according to who offers the best policies for our nation , for families , workers , business , farming ... Ardern & her cronies need to be gone ASAP ... they're wrecking the joint ...
With the science of precision fermentation progressing at a much faster rate than the science to stop farm animals burping methane, the middle- and long term future of this type of animal farming is not good. On top of that I expect that within 5 years everybody who travels half the globe for being a tourist in New Zealand, will be socially crucified for being a top emittor regardless of what he/she offsets. So 2 of the main pillars of the New Zealand Economy will slowly falling away. Then the current account deficit will be really horendous or we plant this country full with fruit and pine trees to earn a little bit of money. (Pine trees not to absorb CO2 but to make all those fancy fossilfuel replacement products they currently produce in the EU!)
If the world economies were run as a team, NZ would be told to go hard on producing protein. We have the highest levels of farming effeciency and no global thinkgroup would favor the handbrake being put on our ag output. The world desperately needs our food, labour and greens policy is leading to famine and bad climate outcomes.
The real problem/reality is still being ignored - I think its a bewilderment that this just cant be happening.
https://www.farmersweekly.co.nz/its-not-just-trees-scaring-the-sheep-away/
You only need to look overseas to see the well entrenched trend that is upon NZ now
The council is also offering incentives to help combat the town’s aging population. After just 60 births compared to 150 deaths last year, the town will grant €1,000 for every newborn.
Its happening here as well and people cant see it - read this carefully - they are worried trees are coming, not there yet, but the decline, scaling of farms, kids leaving for other opportunities etc is already happening.
This is a natural change in action that no law, government, stopping trees or protest group will be able to change.
I'm sure every bit of cost containment counts. For those who are not used to a broken record yet, the farmers must be overpaying for fertiliser as it cannot be obtained from all the available sources. Just as a reminder there are no US sanctions on Russian fertiliser. Labour have seen fit to add a 35% duty on any Russian goods, no exemption for fertiliser. We are assisting Ukraine militarily. I don't quite know how the ETS and the farmers go together but adding emission costs to farmers is going too far. I have no confidence in National do anything much different. ACT is likely to do something and may force National to change their tune. I'm not holding out for it though. I dislike ACT for other reasons and Seymour may turn out to be another Winston. Mostly in it for himself.
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