Increased payout will help farm sales – updated

A rural real estate agent in South Canterbury said when Fonterra’s forecast payout went up 55 cents in September his phone started ringing.

People who had been holding back for the bottom of the market started showing an interest in buying.

Today’s announcement of a further 95 cent increase in the forecast payout will confirm the belief that the market has bottomed out and attract more buyers.

It may also result in more farms listed for sale as potential vendors who have been holding back see an opportunity for a better price.

Farm sales and conversions slowed markedly with last season’s lower payout. The latest increase will widen the gap between dairy returns and those for sheep, beef and cropping which might result in more farmers considering a change to dairying.

However, the sharp drop in last season’s payout and the volitility in the market have made farmers more cautious.

The big payout in the 07/08 season encouraged a lot of spending. This included more intensive systems to boost production which were found to be unsustainable when the milk price dropped.

The most efficient way to convert grass and water to milk is to let cows graze pastures. Our climate and soils allow us to do that very well and relatively inexpensively in terms of both money and the impact on the environment compared with other countries where the feed is taken to the cows.

The decrease in payout gave a reality check and reminded us that our natural advantage is pasture based production.

The increased payout will boost farm sales and it may boost conversions. But those who’ve learned from the volatility of the last couple of season won’t be rushing to boost production with expensive inputs.

UPDATE:

Adolf at No Minister puts some figures on the impact the increase will have on the wider economy.

BK Drinkwater does a payout for dummies translation of the figures.

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