How bad will it get?

Adolf Fiinkensein over at No Minister  thinks the dairy industry’s a bit off colour and it’s going to infect the rest of the country.

He bases his diagnosis on five symptoms:

1 Sliding world commodity prices for dairy products

2 The melamine scare in China and other Asian countries.

3 The world wide credit crunch caused in the first instance by the Democratic Party’s drive for ‘affordable housing’ for indigent blacks and the subsequent sub-prime fiasco.

4 Most of our major farm banks are Australian owned. (Australians don’t understand NZ agriculture)

5 Our trading banks’ attitude to risk and their habit of re-rating individual client risk from time to time.

I agree dairying is not at the peak of health it was a few months ago, but my prognosis is more positive than Adolf’s.

To address his points:

1. World prices for dairy products are going down but this is a correction after hitting a record high. They’re still well above the historical average and while they’re likely to be volatile in the short term they’re unlikely to go right back to where they were before the boom and the medium to long term outlook is positive. As Adolf notes the dollar is going down and that will help off-set any decline in commodity prices.

2. The melamine scare may actually help us because although Fonterra is a minority shareholder in San Lu, more than 30 companies were also victims of the poisoning. Because of that it’s regarded as a Chinese problem and companies which had used Chinese milk, in China and other countries, will be looking for suppliers whose milk they can trust – and one of the first they’ll come to is Fonterra.

3. The credit crunch is already having an impact. Mataura Valley Milk has put construction of its new plant near Gore on hold; planned dairy conversions are on hold and farmers are closing their cheque books. That will have a negative impact on the people who supply and service them but as long as the farmers have reasonable equity they’ll weather the storm.

4. Regardless of who owns them, the banks employ people who understand agriculture here and they’re not going to want to threaten their equity by doing anything which will put a farming business at risk if they can avoid it.

5. If banks are worried about their debtors, and they have reason to be, I think those who’ve borrowed for houses will have more to worry about than dairy farmers.

People who converted for this season or are in the process of converting for next season, who budgeted on a higher payout than is now expected and have little equity will be overstretched. However, one good thing about dairy farming is the cash flow. Unlike sheep, beef and cropping where you get one or two large payments a year, dairy farmers get paid each month and as long as the banks get their share of that they will probably be prepared to watch and wait.

As well as that, interest rates are likely to come down and providing the banks are reasonably confident of farmers’ performance in the medium term they will probably give them a bit of leeway in the short term to allow them to farm their way out of trouble.

That doesn’t mean everything on the farm is rosy, but it’s nowhere near as bad as it was in the 1980s.

Then we’d been dependent on subsidies which were stripped away but the economy was still highly regulated; inflation was over 20% and interest rates were higher still.

We’ve adjusted to life without subsidies and are stronger because of it; and  in spite of Labour’s scorn for the “failed” polices of the 80s and 90s, they’ve left them more or less alone so the economy is freer and stronger. Interest rates are higher than desirable but they’re likely to come down and while inflation too is above the comfort level, it’s still well below the levels we faced in the 80s.

Dairying accounts for about 25% of our exports so Adolf is right that if its off colour the rest of the country will catch the bug. There’s no doubt the economy is sick,  and dairying will be affected, but because it was fitter to start with it’s better equipped to withstand the infection than most other sectors.

3 Responses to How bad will it get?

  1. Adolf Fiinkensein says:

    Points 2,4 and 5.

    2 Where have you been? Malamine has been discovered in milk produced in NZ. That is the risk. It doesn’t matter how small the traces, what matters is how your competitors spin this information in you world markets.

    4 You don’t seem to comprehend that the Australian execs tell the Kiwi execs what the policy will be. For Australians bankers, agriculture is an irritant and a high risk irritant. I suggest you go and ask some of the North Island easy coast farmers who were fo5reclosed upon by ANZ in the 1990s abot your thesis of gentility.

    5 You are wrong. Have a look at the capital requirements put upon banks for ‘commercial/rural’ loans versus residential loans and you might wake up to the risk.

    In the 1990s I spent a good deal of my time finding non bank finance for very good dairy farmers who were threatened with foreclosure by trading banks because circumstances beyond their control had placed them outside the banks’ revised ‘square.’

    That’s what is about to happen all over again.

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  2. homepaddock says:

    2. I’ve posted on this several times, including on the survey on how much Chinese people trust food which Roarprawn discovered was carried out by a firm which does a lot of work for US dairy farmers: https://homepaddock.wordpress.com/2008/09/30/fta-has-fishhooks/

    Fortunately our reputation is stronger than that – though we can’t reast on our laurels because you’re right our competitors will be happy to use anything they can against us if it helps them.

    4. I do understand where the orders come from. But I’m going by the late 80s when there was safety in numbers and the banks held back because they knew if they pushed one farm over a whole lot more would fall. And there’s no point pushing someone out if there’s no-one around with money to come in.

    5. You obviously know more about that than I do. Do you think this applies in general or only to relatively new entrants with very little equity?

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  3. I’m with you on the other points, but deinitely can’t agree with you on point 4 and have doubts about 5.

    However you cut it, the local people will report to people in Australia who THINK they know all about agriculture and will make awful mistakes. I’ve ssen this happen time and again in other industries.

    As for your rebuttal, I’m not sure our banking sector was so comprehensively owned and integrated into the Australian banking sector at that time. Things have changed dramatically.

    It’s a pity Kiwibank isn’t bigger.

    Incidentally and totally off subject, whilst it is a very different beast, i suspect Kiwibank may occupy a similar ecological niche in New Zealand to Bendigo Bank in Australia. Over there it’s called “Keeping the bastards honest”.

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