Keith Woodford explains the decisions and behaviours that have led to dairy’s debt-laden pickle

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By Keith Woodford*

In a recent article, I wrote that high debt levels within the dairy industry will constrain the industry transformation that needs to occur.  Subsequently, I have been exploring how the industry got itself such a debt-laden pickle. Here is what I found.

Despite the industry now being well into the third season of good milk prices, dairy-farm debt with banks has been showing no sign of decreasing. The latest figures for December 2018 show total dairy-farm bank debt of $41.6 billion (RBNZ S34 series). This compares to $41.0 billion a year earlier and $40.9 billion two years earlier.  This equates to around $22.00 per kg milksolids (fat plus protein).

Accordingly, any narrative that dairy farmers overall have been repaying bank debt is incorrect. The figures tell us that for every farmer who has been repaying debt there has to be another farmer taking on more debt.

This in turn raises the question as to what have dairy farmers been doing with the increased cash flow? The answer would seem to be that much of it has gone into deferred maintenance and also new capital, including new machinery and effluent management.

Right now, we are seeing increased production, but that is largely from the fantastic season that has been occurring over much of the dairy regions. There is little evidence of new investment that will lead to ongoing increased production. In essence, it has been non-productive, but in many cases necessary, investment.

The next question has to be what level of payout is required in coming years if debt is to be reined in? A key point is that dairy farmers have always needed capital expenditure just to keep up with the game, let alone any major transformation.  I have an uneasy feeling that the breakeven milk price is therefore higher than commonly believed.

Identifying how the debt is spread across farms has never been easy. Some farms are big and some are small, so it is the spread of debt per kg of milksolids rather than per farm that we need to know.

To explored that question, I could find no official statistics, although the RBNZ will surely have some internal data to assess resiliency to shocks. So I turned to the DairyNZ Economic Survey.

There I found that at the end of June 2017 average term debt was $25 per kg milksolids. Average debt in Taranaki was $28.79 per kg milksolids and in Waikato it was $27.90. Remarkably, 17 percent of Taranaki farmers and 13 percent of Waikato farmers had debts of over $40 per kg milksolids.

These DairyNZ figures include family debt for those situations where family debt has to be repaid. Accordingly, it is not directly comparable to the bank debt which we know is around $22 per kg milksolids.

Caution is appropriate in applying the DairyNZ numbers to the overall industry. The DairyNZ survey is not random, and participating farmers come from those who submit data, usually via their accountants to DairyBase. Regardless, there is a clear message that there many farmers with very high debt.

The DairyNZ survey showed average term debt at June 2017 comprised 49 percent of assets (including livestock and shares) but with 19.8 percent of farmers with debts that were more than 70 percent of their June 2017 assets.

That then raised the question of what has been happening to dairy assets since June 2017.

The latest statistics for land prices from REINZ through to December 2018 indicate that dairy land prices have held up but that the number of sales have declined. However, everything I am hearing from the field tells me that only the best farms that are selling. This greatly biases the average quoted prices.

The messages I am getting are that for most classes of dairy farms, the prices are down 20-30 percent from where they were 18 months ago, and even then the sales are not occurring.   This suggests increasing numbers of farms with minimal equity.

By this stage I had some clarity as to the current situation, but I needed to search elsewhere if I was to understand how we got into this situation.

To do that, I went to the now discontinued RBNZ c27 series which goes from 2003 through to 2016. Eyeballing the data suggested there was a clear break at 2009 at the time of the GFC.

From 2003 to 2009 dairy-farm bank-debt increased from $11.3 billion to $29.0 billion. During that time, milksolids production increased by 202 million kg. So, on the surface, every extra kg of annual production incurred an extra $88 of debt. This is a very high figure!

However, during this period something else was happening. In the South Island, many low-debt sheep farmers were selling their farms to new high-debt dairy farmers, who often set up syndicates leveraged off their existing North Island farms. And in the North island, older low-debt dairy farmers were selling their small dairy farms to other dairy farmers who were on an expansion journey, with these land transfers also financed through leverage against existing assets. 

This all worked because land prices were increasing rapidly which gave the leverage.  The banks were queuing up to finance the expanding farmers.  The result was that overall industry debt per kg milksolids increased from $9.48 to $20.81 Wow!

Then from June 2009 to June 2014 debt rose again from $29 billion to $34.6 billion. But this increase was accompanied by big increases in milk production of 432 million kg. So, total bank debt per kg milksolids actually declined from $20.81 to $18.93.

With hindsight, it is now evident that the seeds of the current situation were well and truly sown in the period from 2003 to 2009. This was the period when farmers got heavily into the business of land-banking and relying on inflation plus capital gain to ‘see them right’.  The banks loved it!

Then came a more focused period where milk prices were outstanding through to 2014 but capital gain was more restrained. The new debt was used alongside profits to generate increased production, although some land-banking was still occurring.

Most recently since 2014, the industry was for a while drifting towards a rocky shore, but with improved prices has now become becalmed, at least temporarily.  Two years of bad prices plus 2.5 years of good but not outstanding prices have largely cancelled each other out. For most farmers, low interest rates have been the saviour.

The big questions that remain to be answered now relate to the future. That is too big a question for now, except for some key observations.

First, banks are no longer queuing up to finance dairy farmers, and when funds are available, government policy says that funding is no longer to be on interest-only basis. Second, the overseas buyers have disappeared, linked in to new Government policy on overseas investors. Third, dairy farmers have lost confidence about the future linked not to milk markets but to societal pressures.

The overarching outcome is a debt constraint that comes up against the industry transformation challenge.

*Keith Woodford was Professor of Farm Management and Agribusiness at Lincoln University for 15 years through to 2015. He is now Principal Consultant at AgriFood Systems Ltd. His articles are archived at You can contact him directly here.

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