The latest fall in dairy prices raises many questions for everyone involved in the dairy industry.
Fonterra is cutting more than 500 jobs.
Farmers are rethinking everything.
But how will the bankers respond?
We asked Graham Turley, the managing director of commercial & agri banking at ANZ New Zealand some questions. ANZ is New Zealand's biggest rural lender with about $11.3 billion of dairy lending. Here are Turley's responses.
interest.co.nz: How will ANZ respond?
We’ll be keeping in close contact with our customers to provide whatever support and advice we can, and would encourage farmers to not hesitate to get in touch with us.
At times like this, it’s very important for farmers to have a clear picture of their situation, to understand their options, get advice and plan ahead.
They also need to look after themselves emotionally as well as financially. Communication is key - they shouldn’t feel alone in this situation, and should ask for help and support from everyone involved - family, advisers, fellow farmers and professional advisers as well as their bank.
interest.co.nz: Will more or less credit be available to farmers?
Turley: Farmers need money to operate their business and ANZ is supporting its customers. Further than that, we know that farmers need to make their business as efficient as possible and that requires investment.
In the short term, many farmers will be configuring their businesses to ride out the low prices, but as always will need to innovate to meet the challenges ahead.
Growing global demand, intensified competition, tighter environmental regulations and easier access to markets will combine to make the industry of tomorrow much tougher than it is today.
It will be vital for farmers to increase the productivity and efficiency of their operations. We have recently extended a low interest loan package, that we have used to help red meat farmers improve pasture and forage, to dairy farmers.
In terms of business governance, efficiency gains can be made by a disciplined investment and management regime, assisted by sophisticated farm system modelling, financial modelling and environmental outcome modelling tools.
interest.co.nz: Will there be a pullback in lending to the dairy sector?
Turley: We’re confident in the future of the dairy industry and will support our customers in this low commodity price period.
interest.co.nz: For farmers with high debt - especially dairy farmers - will the bank be amenable to extending terms? Will you permit increased borrowing despite a poor short-term outlook?
Turley: Every farm has a different cost structure, and we’ll be working with farmers to work out the best way we can help them respond to current challenges.
19 Comments
Go into a bank tomorrow, tell them you are going to make a net loss of $300k this year, then ask for an extra $100k loan. If you are a dairy farmer you can get it, never mind that the money is going to be used to pay the groceries et al. Now try the same thing, as a non dairy farmer, you can have 100% equity in your business, and still have to twist a few arms, and break a few legs if you are not in the exalted position of being a dairy farmer. Don't take my word for it, go and try it, forget about the income, try and get a $100k loan to cover living expenses.
it's a tragedy, think of all those farming families who have committed to hugely expensive irrigation schemes and dairy conversions. Lots of dairy conversions going a head in the South Island, both family and corporate. Maori corporations have made huge commitments as have Landcorp with their forestry to dairy venture along with a Swiss concern in the Central North Island.
Those irrigation schemes will now be a ball and chain around farmers necks, we will see a transfer in ownership, to foreign funded corporates when the price is right.
Fonterra need to be able to say no to new milk, and charge for pickup.
The banks will start to say no any minute now, just one phone call from head office and rural NZ is in depression. Which will flow to the cities in due course.
grazing paddocks can be turned to crop (if not too steep).
Or forestry (yes, long wait for gain, but still not wasteland).
.
It is a wise move to try and diversify. Any investment consultant worth their salt will tell you the best thing to do to protect and grow your investments is to not have all your eggs in one basket
You are obviously right. I'm just amazed some people use their mouth more than their brain. Markets go up and down, and there are always unlucky people caught up. People spending their whole life analysing the market wouldn't be confident enough to call what'll happen next month, yet some commenters here appear absolute "genius". Making a move always carries risk, while sit on your behind can usually appear smart - yet eventually you'll see the difference.
I get all misty eyed when I hear how much the banks care for their customers and how willing they are to support the farming base.
The bottom line is, especially for the most 'at risk' group, they will not be able to continue to trade without significant income improvement or drastically reduced indebtedness.
One does not seem able to reliably control the former and the latter is subject to the percieved market value of ones holdings and the ability to realise the cash to sort the debt.
Putting ones head in the sand will just not do !
These periods of low commodity price come round regularly
They do happen, however what is different this time is the cost structure of farming - and no it isn't just cost of land. Many farmers have owned their farms for years and have little or manageable debt. But you need cashflow to pay the bills. If you don't have cashflow you can't pay the bills - doesn't matter what your debt levels are.
Two things; don't want to become farm owners through the foreclosure on mortgages (or seen to be selling more land to foreign buyers) and bad kharma to be driving your clients to suicide.
It all adds up to avoiding admitting they screwed up constantly pushing the upside while ignoring the down side.
Remember Andrew Ferrier and his $8.5 mill golden handshake. Looks even more ridiculous today.
Former Fonterra chief executive Andrew Ferrier received a payment of $8.2 million when he left the dairy giant this time last year.
Fonterra chairman Sir Henry van der Heyden at a presentation of the company's annual results for the 2012 year today confirmed the payment was to the Canadian, who had headed New Zealand's biggest company for eight years.
Van der Heyden said the payment was a "wash up" of money due to Ferrier under the company's long-term and short-term performance incentive pay structure.
"I know it's a lot of money....but it is all based on performance....", he said.
Last year's annual report suggests Ferrier was paid between $4.9m and $5m in the year ended July 31 2011.
Ferrier was succeeded by Dutchman Theo Spierings, who marks the end of his first year with the farmer-owned cooperative today.
- BusinessDay.co.nz
What will banks do? They will do what they have always done, which is what their capability extends to.
They will lend on tangible assets - which means anything they can see, whether it's a truck, a house or a farm. These assets may be productive, but productivity - which is the essence of business - is beyond the influence of bankers. Once the loan is made, they are, in effect, book-keepers. All that matters is the ability of the borrower to service the debt.
Rising asset prices, as in the matter of houses and farms, provide comfort to the bankers and, in escalating sectors, are used as justification for the loan. So the bankers tend to blow bubbles and business fundamentals pop them. All this, of course, is obvious.
It may be that an Australian-owned banking system (excepting our few New Zealand players, though these tend to follow the same model) is most familiar with, or conditioned by, the characteristics of the commodity sector, which is most plainly cyclical.
But the cyclical nature of the sector - the commodity sector being the horse our government and bankers have bet the money on - is only one issue. Perhaps more important, the commodity sector, by its very nature, is subject to long-term price decline. The cycle may revolve, but it is running down hill.
Asset prices in the New Zealand farming sector (and not only in this sector) tend to mean levels of indebtedness. These are no sure measure of productivity, and they are no protection versus market fundamentals.
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