Reserve Bank sees further farm price falls; warns of dairy farmers facing negative equity

Thought that was the case....banks holding back in an effort to keep the bubble up...fat chance of conning the farmers on that one....the word spreads like hot butter.

Don't panic.

It'll be Taxpayer to the Rescue, as always.

Add Te puke kiwifruit to the mix

And the truth about the storm damage down south has been swept under the woolly rug.....!

Farm prices have to have some relativity to income. If I was on $50k per year would the bank lend me $1million to buy a house? No they would show me the door. But this is exactly what has been happening to farms. The lending is unrelated to the income. For the sake of a new generation of farmers who want to buy a farm it has to be run like a business and not a pyramid scheme.

Is anyone really surprised by all this?  Policy, public institutions have been aligned to consumption and debt, the land and buildings Ponzi scheme, assisted by our inflationary and inflating OCR, absent capital gains tax all promoted exactly what we got.

Unwinding it is scaring the shit out of everyone how can see further than the next feed.    

Is anyone really surprised by all this?  Policy, public institutions have been aligned to consumption and debt, the land and buildings Ponzi scheme, assisted by our inflationary and inflating OCR, absent capital gains tax all promoted exactly what we got.

Unwinding it is scaring the shit out of everyone how can see further than the next feed.    

John/ Les I told you years ago, as long as a nation is forced to consume “Coro Street” and “House for sale” at prime TVtime in stead programs about production/ manufacturing e.g. NZapples form Nelson are grown, harvest, processed, packed and shipped, we don’t see any changes.

The changes you are looking for need a culture change among a wider population including professionals/ politicians in this country first – means solid basic PRGround- work with the media.

NO Roger ! I had to, but I go again- bye !

With Fiat money getting materialised with a keystroke, US treasuries at 2.5%, residential and commercial property looking shakey and precious metals through the roof, agricultural land looks to be as good a place as any to have ones money invested. I believe land prices in places like the Mid West and Brazil are booming.

Land prices have corrected here but I dont see them slipping too much further whilst our terms of trade look so positive and interest rates stay low. The outlook for agriculture is probably as positive as I can recall, there are some powerful macro trends in our favour.  Since most farmers have timelines in decades if not generations how land prices are trending in this quarter or next is of little consequence.

So sheep Shagger lets look at some dairy production figures;

Europe,

Milk production in France is gauged at 8% higher
 than a year ago.  The gains are from quota increases, better weather and feed, and higher returns.  Pricing levels for skim milk powder and whole milk powder are lower and reflect weaker markets with low demand for exporting at current levels.  International buyers are slow to make future commitments and taking a more wait-and-see attitude.  No intervention bids for SMP were accepted for the lasted rounds of sellback bids.

In NZ

Milk production levels are running about 3% higher
 than a year ago currently with forecasts to finish the season 1-2%  higher.  Processors are welcoming the stable milk patterns and hoping  for factors to remain stable.

Lets see where all that extra milk goes before we get too excited.  Andrew

Aj

Im not making a prediction that land prices are undervalued just that theres no fundamental reason for them to crash as sometimes opined on this site. I suspect(down here anyway) that they will tick along at around current levels as most sellers will have no need to drop their pants. If product prices did fall or interest rates rise then that might change but until then I expect its a case of steady as she goes.

SS, I forgot to add that in the USA milk production is also up, in some States by over %6. The dairy industry has underpinned the price of sheep farms in this area, with out the conversions  there will not be the money available to sheep farmers who have sold into the dairy boom to chase sheep and beef prices to unrealistic prices based on returns.

 We have had the most terrible seasons, for the past 4 years and many now think that this could be the new norm, until profitability returns I dont see farm sales going anywhere in a hurry. I am noticing a huge increase in the amount of cash cropping,  this cold season isn't helping the crops and now its dry, I never chase rainbows in farming, its the one sure way to lose thew farm, better to cut costs.

As Robert Shiller points out in "The Unlearned Lessons of the Housing Bubble", the world is NOT running out of land either for housing OR for agriculture.

If certain parts of the world got their cultural shite together, it would be all over for primary-produce-dependent countries like NZ. In fact, Brazil alone looks likely to stuff it up for us.

Trems of Trade have trended against us 4-fold over the last few decades and this will only worsen. Most of the time, NZ has been a helpless price taker on international markets. Dependence on primary produce is now the quickest route for a first world country to rejoin the third world.

Failure to diversify in directions where the real money is, is already costing us dearly. Cities are where all the growth in wealth has occurred internationally for the last half century. Yet we "preserve farmland" and constrain our cities from growing? And we push the price of land for all non-rural businesses up 10 times, 20 times, and more?

I nominate NZ for a new "Economic Darwin Award" specially devised for us.

Was talking to the Bank Manager this week.  He says so long as dairy farmers are cashflow positive they are letting them be - even if there is no equity left.  With the payout as it is, most of those with high debt are cashflow positive. They are 'managing' placing the worst off, on to the market. 

He did make me chuckle tho - said "I can't understand why farmers aren't borrowing again, with interest rates so low and payout so high - seems some of the 'young guns' haven't learnt anything yet.  Mind you he was also desparate to loan us some money.

I disagree Sheep Shagger with your thinking that this is a most positive time for Agriculture. We have some major problems. Perhaps the most worrying is our perception in the public eye. We are seen as rich buggers who are ruining the land. We are entering dangerous times and with this notion becoming popular the thing to watch for is future politicians capitalising on this.

Next would be peak oil, and combined with the former, who is to say we will be able to carry on as we are. We are not the cheapest producers of protein any more, we dont even grow grass as good as we used to...

Debt ridden... thats us, under a pile of mortgages owed to Aussie banks that is weighing us down like a tonne of bricks. So if anything came along to shock us,  how would we cope, not good I reckon.

As AJ points out, we are entering our 4th big dry. Maybe. Likely. As a group Sheep and Beef farmers are shockingly understocked, no stock, no production. Milk producers are shockingly overstocked...and that doesnt pan out too good either.

Our meat companies are...in turmoil, with vast overcapacity, and some poor balance sheets. They compete with each other to the bottom of the market.

Wool, well its off the bottom of the heap, I guess we can dream.

Perhaps like you I am reasonably positive about my own situation, not so for us as a whole. Too much  debt, going into peak oil and currency wars. Looks scary to me. Just because commodities look good, doesnt mean we will end up with a good bit of the pie. I have lived on hope for so long, now I am more realistic, farming will only make me rich if it is the pleasure of living here that is the richness of my life.

PhilBest was right on the button. We have our sub prime situation like the US, except the banks and the property owners are too frightened to let the general public know about it.  Many stressed properties should have been placed on mortgagee sales, but banks did not want to flood the market with these properties fearing that they might further depress property values.  Many farmers are already in the negative equity situation.

Countries in South America like Brazil, Uruguay, Chile and Argentina have many good farm land which have not been fully developed to their full potential. It is a matter of time some smart cookies (many ex NZ farmers have been developing farms in these countries in the past years). Their cost structures are lots lower than ours (much much cheaper land, cheaper labour, utility and compliance costs).  Currently some Chinese companies are working very closely with the Brazilians to develop some very large farming and horticulture projects, it is a matter of time our farmers will face some serious competitions from these countries for similar products on the global market. I was laughed at by our farmers when I mentioned these facts to them.  Remember when Toyota started selling cars to the US, Ford and other US car manufacturers did not take Toyota seriously, the rest is now history.

Many people seem to have tunnel visions and head in the sand mentality,  it is good to think we are the best in farming, but the reality is going to be very different.  If we don't adapt to the changes around the world, sooner or later we will be victims. Our high cost structure will eventually make us uncompetitive.  The Crafar Farm is a good case study for all of us with regards to debt level, business development and management.

The Chinese and Indians are very good at managing cost, just like the way they have managed their economies so well compared to the US and EU etc. We have some serious structural, financial and organizational issues here that need fixing fast before it is too late. If China can develop their high speed train and other technologies so quickly and efficiently, as farming and horticulture is not rocket science, it will not take long before they become an expert in these fields, we will not be able to compete against them in the primary product fields. There is a storm brewing, the BRICS countries (Brazil, Russia, India, China and South Africa) have regularl dialogues among themselves, and they have long term plans in all areas of B2B activities including food production. There is no shortage of finance, technology, good farm land and skilled labours in these countries.  It is a matter of how soon they will challenge our perceived strengths on some food production, when it happens, the initial impact  will be prices of these products. By then are our farmers still competitive? For this reason,  I personally would not like to be your average conventional farmer, I will be investing in innovation (either in new products, or in new farming technologies and highly skilled and educated workers), create more links with high growth region like Asia at all levels.  May be we should start employing some of our highly qualified taxi drivers who came from India or China to help us to create market opportunities in their home and surroung countries, afterall they can speak the language, understand the culture, have the network of business contacts in their home countries. Unfortunately many business owners in NZ just don't seem to undestand this, many seem to think that English language is the only requiremenbt doing business in Asia, understanding of local culture  and language is irrelevant to their business venture in Asia. They seem to lack the ability to change and adapt to different environment.

Lock down, corn, silver, Sugar next  milk?

http://market-ticker.org/akcs-www?post=172082

I agree with Sheep Shagger.  If the ROC remains reasonable and cashflows are positive - there is no reason for land prices to crash. 

Unlike most of you I probably have reason to be fairly disillusioned with the industry -  I have recently purchased a dairy farm (with a fair bit of debt) and have a gold kiwifruit orchard that has been sitting under restricted movement notice for two days due to the PSA scare.

Granted there is a fair bit of risk involved in the industry - and while there may be a few write downs in the kiwifruit industry if the PSA takes hold and adversely affects the value of land - that's life. 

As the dairy industry stands - we budget conservatively and price in interest margins that are 20pts above where they currently are.    While equity changes may eventually effect the wealth of my children (positively or negatively) that isn't my immediate concern.  Unlike some commentators on this site - we aren't all greedy and in for the quick capital gain (dare I say property investors).   Compared to my last job working in corporate Melbourne - the farming vocation wins hands down - even if life throw us a pile of shit called PSA every now and then.

Been away for the weekend in magnificent Southland. If theres a better place on the planet for pastoral farming( excepting the recent storm) id love to see it. Grass for miles, stock looking fantastic, told the wife it was farmer porn driving through such lush surroundings!

Phil Best, your idea of urban sprawl being NZs saviour makes no decernable sense to me.

True Value, you make a fair point about Brazil in particular. They will develop fast and be huge influence, they also have water which is where NZs comparative advantage lies and where many of the other countries mentioned do not. Look at the effects of the current Russian drought to see an example of a country with massive potential unable to be consistently realised. Australia also, trying to work out how to cut back 40% water allocation to the Murray, Darling Basin. China has massive water issues both quality and quantity which will severly restrict its ability to feed itself.

The world needs Brazil. I as a human being find the spectre of people starving as unacceptable. The planet is groaning now and need to find enough food to feed 3 billion extra people by 2050 is extemely problematic. New Zealands future is not to compete with the Brazils in the commodity game it is to be a supplier to the high end. We have the ability because we are small and nimble and importantly  own and control our own co operatives and hence our own destiny's. A situation I hope we have the foresight to protect.

As for peak oil. It seems to me that agriculture is hedged against oil price hikes. Given that the price of oil moves corn into ethonol and the chain effect of that through stock feed costs and hence production. So in effect if one believes in peak oil and population growth then an investment in NZ pastoral land might be abit smarter than the doomsdayers here give credence.

SheepShagger,

Typical NZ "backbone of country" business:

Farm: thousands of hectares, sheep or cows crapping all over it, profits for farmer $100,000 per annum, jobs provided, 6 jobs at $30,000 per year. Export income, $2,000,000 per year.

Typical German "backbone of country" business:

High tech manufacturing business: one acre; profits, $2,000,000 per year; jobs provided, 20 at an average wage of $80,000 per year; pollution of environment, negligible; export income, $20,000,000 per year.

Spot the reason that one country is rich and getting richer, and the other WAS rich once. Now explain to me why someone who might start the latter business in NZ today should have to pay $2,000,000 for his one acre of land, and the farmer can get thousands of hectares for less. THIS the result of nothing more than council urban planning policy.  

By the way, one really good article once claimed that Bill Gates would never have got started if he had had to pay "post urban planning" California land prices for his first premises, rather than the "pre urban planning" prices he and other Silicon Valley entrepreneurs DID pay in their day. Now does the thought not scare you, about how many Microsofts (or even Gallaghers or Rakons) NZ might be missing out on? (California is losing Silicon Valley businesses hand over fist right now, to less stifled, less anti-business States and countries).

One Economic Darwin award, coming up.

PB, $2m per acre seems a rather extreme figure. I would hazard an uninformed guess that there is plenty of unutilised industrial zoned space or available premises available at far less, without having to gobble up yet more valueable farmland. However I try to make a point of not making bold statements about things I know nothing about so perhaps that unbelievable figure is right and then you have a point.

The thing I always struggle with is why does it have to be a them and us situation with agriculture. Opinions to this site regularily decry farming as if it is at the expense of all else. I concede in some situations there is potential conflict but in essence the non performance of other parts of the economy is a seperate issue specific to the sectors involved.