Dairy businesses managed by corporate structures are proving to be more resilient to global dairy price slumps than family-operated entities, according to ANZ.
The findings come in the ANZ's annual 'Privately Owned Business Barometer'.
The country’s biggest rural bank lender, which has about $11.3 billion of lending exposure to the dairy sector, has surveyed 368 respondents from across the dairy industry (farming and support), including small-medium sized businesses, commercial businesses, farmers, and Maori businesses, via an online survey.
It concludes a larger portion of the surveyed dairy businesses, managed by boards, grew their profits over the past year, than those that weren’t managed by boards.
On the flip side, a smaller portion of business managed by boards saw their profits decline, than businesses not managed by boards.
More businesses with boards saw no change to their bottom lines than those without boards.
ANZ says, “In businesses with larger, more corporate structures and businesses with boards, there is evidence of the value of the more formalised business management and decision making processes. These ‘corporate’ processes are often very different to what many farmers are used to.
“However, most see this as a positive change as they impose disciplines on the business that are both necessary and beneficial – and data from the Barometer indicated that they have a beneficial impact on the bottom line.”
Looking at the stats again, a larger portion of dairy respondents with boards calculated their operating profits on weekly, monthly and quarterly basis, while a larger portion of businesses without boards did these sums on a half-yearly or annual basis.
The results are similar when looking at how often dairy businesses calculate their returns on assets. While the majority of respondents did these sums annually, those with boards did the maths more regularly.
ANZ notes 30% of its respondents have boards, reflecting the size and complexity of some dairy businesses, and the growth of new ownership structures such as equity partnerships.
It says these provide an alternative path into farm ownership, and are a means of succession.
Traditional family farm ownership not the norm in the future
Having helped finance over two thirds of all rural equity partnerships in New Zealand, ANZ says the increasing amount of capital tied up in a farming business means traditional family ownership may not remain the main form of land ownership in the future.
It says, “Most equity partnerships have boards, and it was interesting to note that equity partnership respondents… showed quite a different result to that from family businesses.
“The increased scrutiny boards place on budgets and results caused equity partnership farm managers to examine and prepare recommendations more thoroughly, and with more analysis.
“It was expected that current commodity prices would most impact large-scale South Island dairy operations converted in the last decade, but there was some feedback from advisers that family farmers are finding conditions a greater challenge for this reason.”
Grim outlook
ANZ says it’s noticed those in the agri industry change their mindsets and focus more on profit.
This is perhaps no surprise given the fall in global milk prices demonstrating the volatility of the market, and the fact the industry’s facing increasing competition in global markets, with the removal of milk quotas in Europe and the growth in large-scale operations.
Fonterra last month issued its opening 2015/16 farmgate milk price forecast at $5.25 per kilogram of milk solids, and cut its forecast for the previous season to $4.40 - an eight-year low.
Furthermore, the industry’s being grilled on whether it’s reaching its production limit from an environmental perspective, raising the question of where growth should come from.
Accordingly, ANZ concludes 42% of survey respondents saw a reduction in profit last year compared to 27% for other agri sectors.
It believes dairy farmers will experience an average income reduction of $292,000 in the middle six months of 2015, compared to the same period last year.
“As a result, DairyNZ is predicting that many will remain in overdraft for the whole year rather than returning to the black at some stage during the summer months, as per the normal seasonal cycle”, it says.
ANZ points out low interest rates mean debt levels aren’t as much of an issue as they were a decade ago.
“However 25% of farmers have debt of $33 per kilogram of milk solids produced, and this is difficult to sustain in anything but the most efficient of operations. The high pay-outs of 2013-14 have provided some wriggle room for farmers – but this has now run out in the 2015/16 dairy season.”
ANZ says that while respondents saw decreased profit growth in the short and medium term, they were more upbeat about the longer-term (3-year) prospects.
Rabobank has reached similar conclusions in its quarterly ‘Rabobank Rural Confidence Survey’, also released today.
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“As a result, DairyNZ is predicting that many will remain in overdraft for the whole year rather than returning to the black at some stage during the summer months, as per the normal seasonal cycle”, it says.
ANZ points out low interest rates mean debt levels aren’t as much of an issue as they were a decade ago.
“However 25% of farmers have debt of $33 per kilogram of milk solids produced, and this is difficult to sustain in anything but the most efficient of operations. The high pay-outs of 2013-14 have provided some wriggle room for farmers – but this has now run out in the 2015/16 dairy season.”
ANZ says that while respondents saw decreased profit growth in the short and medium term, they were more upbeat about the longer-term (3-year) prospects.
It's the same deceptive narrative when it comes to the residential real estate market. There must be a mandatory global training seminar spitting out the same nonsense.
But higher rates could spell trouble for pricier West Coast cities, such as San Francisco, Los Angeles and San Diego, where home prices are already out of reach of many residents and would only be made worse if mortgage rates rise.
In Los Angeles, for example, with mortgage rates at 4%, a typical household would have to spend 41% of its income on mortgage payments to buy a house for the median price in the area, according to Zillow. If rates rise to 5%, that household would need to spend 46% of its income to afford mortgage payments.
That description sounds precariously similar to a bubble – where all but the interest rate lends toward “unaffordable.” Each and every mainstream treatment of the rate “conundrum”, however, is also quite careful about its ultimate reassurance regardless of any interest rate movements; growing income and plentiful jobs are simply expected to offset any negative pressure from interest rate “normalization.” Read more
ANZ has a high exposure to equity partnerships . Only takes 1 partner to fold and you get the proverbial mad person spreading dung.Good to see the boys are finally listening to Pita Alexander ,but a whole generation seems to have bypassed his wisdom and it's going to take more than a board of so called directors to get through this buggers muddle .
We are reaching the end of a long cycle since the 1980s where interest rates have dropped and inflation of farmland and commodities prices has help farmers pay off the farm, as a farm bought in 1980 might have cost $1000/ acre it is now could be worth $15000 or more. But now interest rates are getting to the point where they can't go much lower, is this the end of inflation? As interest rates near the bottom the only way for interest rates to go is up. Is it the right time for someone to try and buy a farm? Will land and commodity prices just stagnate or go down in the next ten years as monetary policy loses it's effectiveness to create growth or interest rates have to start going back up.?
Not necessarily - but I am trying to catch the eye of those that up until most recently could not accept that banks conjure up loans out of thin air to create deposits. Now it is clear to all and sundry that it is those same depositors that are in effect one step away from having what was thought of as savings transformed into extinguishable equity, they might take more care to reward them properly or at least slow down the money from nothing flow routine. Read more,
The problem with those conjured loans is that their sources is money from tomorrow and comes with Time-Value-of-money and currency-scarcity (from transferring a periods projected sales (revenue) from a future period to the existing period...(in order to cover-up poor performance in this period...and pretty much guaranteeing shortfalls in the future periods (scarcity again, and Keynesian clawback to repay the loan - it's like paying expenses on your credit card (loans are bringing forward of future income) if you couldn't afford this seasons shortfalls, then how can we afford future seasons shortfall with the same structure AND the cost of the debt (interest AND principle)
This would have to be bank endorsed therefore I hope any of those suppliers if owed money take them (the farmers) to bankruptcy. farmers collectively where they know that this is going on, need to pillory farmers engaging in this behaviour - if these suppliers are going to be broken by the 'big boys' behaviour then all farmers in that area lose.
It also comes down to the fact, if you owe the bank 1 million you have the problem if you owe them 10 mil they have the problem.
Banks will just keep rolling over the debt to the corporate farm because they are too highly geared
While mum and dad farms are like money for jam for banks. easy to roll over and very profitable.
Rolling over big-debt - it's called ever-greening
As the corporate farms get bigger they acquire more influence, more lobbying power. Would like to see a list of who the largest 10 supplier/shareholders in Fonterra are, who they were this year, last year, and the year before
“However 25% of farmers have debt of $33 per kilogram of milk solids produced, and this is difficult to sustain in anything but the most efficient of operations.
Do you think this is 25% of that banks borrowing clients? Usually when talking industry (borrowers and non borrowers) people say 10% have borrowed/been loaned a bit much....
On the other side, what /kg value of farms are they using, $45? $50. (look out the lvr).
Lucky forced sales don't count in comparable sales valuation method.
Source for the 25% of farmers with debt of $33 per kilogram of milk solids is DairyNZ's 2013-14 economic survey.
The Return on Assets by system type data is also from DairyNZ and for 2013/14.
So, data from self selected surveys run by an industry advocate. Expect reality to be somewhat worse.
Crafars had been operating for a long time. My old boss was one of their protege.
There system was the classic for the time. Do everything on a shoestring budget. Things like a roof on a dairy shed were frivolities. Sharemilkers were expected to operate the farms "as if they were their own. If a sharemilker wanted fancy calf rearing equipment that was their responsibility and choice, if they didn't want a pot spreader and wanted a easier self-propelling effluent spreader with a high power motor, that was the choice of the sharemilker running the operation..to provide it for their own operation. These are the conditions that Crafars and others had learned and been brought up with. If you took on a 600 cow herd business then you were supposed to know what you wanted and needed and act accordingly; no point complaining later that it was too hard or that you were sick. As the business operator you were expected to know and be responsible for achieving success.
And the Crafars bought cheap stuff, second hand were it was available. the biggest gain _used_to_ (in my fathers time, be getting a zero or margin property or business and getting it started. This is the process for a _lot_ of properties and businesses, up to about 10-15years ago. I have a suspicion that the change is related to the rise of the double income family and removal of parallel importing contracts, as the social change and timing is about right. By then the Crafar empire was well established, as were the management philosophies tied to the business operation.
The other factor that used to be important is volatility. Costs used to be very variable, income not quite as bad. So it was common practice to have "a thin year or two" and to just cut back on all spending and carry through with medium-term debt.
Then in the 1 in 7 good year, it would, theoretically clear that debt.
but instead of clearing the debt, the Crafar system was cheap, and they'd double-up instead, and normally the proceeds of average years would reduce the debt before it hardened.
this system worked back in the day when workers and their families were expecting to take on dairy as a whole life/whole family activity, especially if the family had outside equity and income of their own and were able to invest it into their business, and apprentices/labourers expected to use their long labour to get skills and training.
It also worked because the Crafars formed the "sweeper" and "fire-fighter" so when issues did come up or the equivalent of a consultancy was needed they had experience and influence to cover the problems. But same as any unscable system, as the farms got bigger and travel further between all of the farms, not to mention the Crafars themselves getting older, they became less able to micromanage the gaps.
The with modern changes with employees expecting "jobs" not lifestyle commitments, and employees not brought up on (emerging-level) farms or with old school farming work ethics. The same commitment and skill wasn't there. Also sharemilkers would come on with bigger herds, more debt, and less willingness to "get a job at any cost". These bigger herds meant bigger commitment to animal welfare, more than the old systems used to have and more than the incoming sharemilkers were expecting or prepared to manage. Add that to constantly falling real value of farming returns and you have the recipe for the Crafar disaster.
In and of itself it really isn't too much different from the Georgie Pie failure, except the dairying one took longer.
Yes sharemilkers didn't get paid. There staff didn't get paid by their sharemilkers. But if you're part business owner, you expect staff to turn up and managers to perform to get paid.....
And how perfect is this game as well? They foreclose on the privately held hard assets for which they are a secured creditor - whilst also clipping the ticket on the unsecured creditors who backed their reckless risk taking. It's a game made in heaven for the corporatist.
absolutely, and IMO it's the sign of completed corruption of the capital process.
Because at that point it has become impossible for the individuals capital to obtain value thus those who monitor the system have let it fail and no longer does it serve to help the entire capital base. Without the means to feed (and inspire) all of the social and economic creature the resulting real returns will start to shrink. (an affect of the debt slavery)
I beelieve that more expert members of this forum have expressed such a thing when discussing the importance of maintaining labour returns vs capital returns.
If the former is too prominent then we can't invest for tough times or a future when we might not be able (or if successful enough, want) to continue labouring.
If the latter is too prominent then the majority of what we do is not enough to counterbalance the "legacy debt" (generic, not inheritance term) that society and influential players have amassed/control.
I does depend on, in the longer terms, what people want from an overall society. for a pleasant "Western" style economy, people need to have hope, and a sense of personal freedom.
Other places the maximum productivity from the workers, or great monuments, or uniformity can all be goals they set for society. Sadly such plans cannot co-exist, one cannot have mass freedom, while enforcing conformity (which is gerneally why Libertarian systems collapse, as the overhead to enforce "fairness" carries an increasing resource cost to enforce "against the natural tides".
But the laissez faire market fails in the opposite direct. A similar accusation is often leveled at environmentalist and "Greenies". That they ("greenies") are the only ones who would expect to put a white post in a forest and expect it to stay white. The natural forces/tides within nature and living systems decree that change is certain thus there are times of ebb and flow. While the "greenis" have their "white post", the "open market" people are the only ones who expect to toss a bunch of bricks in the air and have it come down not only as a house but as the ideal house!
As the man said at the funeral today, everything has it's season. That is the law and religion I respect. A time to save and time to invest.
where we are heading is in a direction of global communism. There is no real economy, I don't believe that now is the time to invest and make money, you need to protect what you have got. If you can only afford a 30% deposit on a house in Auckland , i think you are a mug. You'd be better to just buy a cheap house in Palmerston North at least you'll own it. The 30% share you own in Auckland could vanish.
Actually citizen suppression ie a police state run for the benefit of the present well offs and their corporate masters/sidekicks so far more like fascism. If that cant hold together then maybe even anarchy. The rest though I agree with you, except I think the losses will be more like 60~75% not 30%.
That Greece deal will be a disaster. No hope for ordinary people there trying to make money from tourism struggling with an overvalued currency. Meanwhile more taxes for the rich businesses and pensions. Wealthier countries like Germany will suck the life blood out of them.
Seems extend and pretend is reaching new highs. This stuff is just comical,
Its not a default if the Greek Govn honours private debt but fails to pay the IMF...
http://www.marketwatch.com/story/missing-imf-payment-may-not-put-greece…
wtf........LOL.
http://www.bbc.com/news/world-europe-32332221
so who doesnt get paid? IMF? public sector? so lets re-employ the ppl we sacked but um not pay them any wages? so the greek restructure really is going well.
Sometimes I wonder if exiting wont be way less painful for the Greeks.
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