The dairy downturn

It was interesting in Parliament this week, listening to the Prime Minister repeatedly say “I don’t know” to straightforward questions from Green co-leader James Shaw about the effect the dairy downturn will have on farmers, small businesses and rural retailers dependent on a good price on milk solids for their prosperity.

In fact, his admission that he “doesn’t have a clue” how many farmers will go under as a result of the dairy downturn shows that the Government is in denial about the scale of the threat facing our wider economy.

After the Reserve Bank predicted in late 2015 that up to 44 percent of dairy farmer loans could become non-performing and Federated Farmers said two weeks ago that 11 percent of dairy farmers were under pressure by banks, you’d expect the Prime Minister to have a basic grasp on the extent of the threat to the economy.

You can’t manage what you’re not measuring, and the National Government is clearly not measuring. Or listening.

In fact, the Government has done a lot of talking, and not much listening for the last eight years.  It  has duped farmers into thinking that there would be a never-ending river of white gold, luring them into large amounts of debt, incentivising large irrigation schemes with the promise of big returns and subsidies, but the opposite is happening.

You can’t manage what you’re not measuring, and the National Government is clearly not measuring. Or listening.

Throwing good money after bad through large irrigation schemes and pretending the dairy sector is business as usual is not helping farmers and small businesses cope with the current downturn. Irrigation has encouraged farmers into a high cost, high input model focused on maximising production rather than increasing profitability. Now production costs are too high.

The last thing New Zealand needs is more farmers going into greater debt to pay for irrigation infrastructure that is not helping them grow their profitability.

What the whole dairy downturn shows is that the Government is out of ideas, and has its head in the sand about real issues facing New Zealanders.

It says that to help the dairy sector, parties like the Greens should support the TPPA as if it is a silver bullet for all our woes. The TPPA will only reduce some tariffs for New Zealand dairy exporters – though not all the tariffs in the USA, Canada, and Japan – and the tariffs won’t be fully reduced until 30 years after the TPPA comes into force.

The cost of these tariffs at the moment is only about two percent of our dairy export value; a drop in the bucket. So in 30 years the TPPA might make a marginal difference for farmers and dairy exporters – but it won’t do anything to help farmers tomorrow, next week, or even next year.

The next crisis farming will have to deal with is climate change. Adapting to the conditions caused by climate change will also require leadership from the Government, leadership it seems unwilling to show.

Ministers are sticking with their ‘growth at all costs’ strategy, which is clearly not working out that well.

With increasing numbers of dairy cows per hectare on the nation’s farms – double since 1990 –  the Government has created a perfect storm, where the demand for water is ever-increasing but less likely to occur naturally. In just 11 years, the number of dairy cows in the Canterbury region for example has risen from 542,000 to 1,304,000 – a rise of some 140 per cent.

So if farmers are faced with increasingly frequency of droughts, what can they do about it? Irrigation has made the conversion to and intensification of dairy farming easier – in the short term. In the long term, it forces farmers to become reliant on irrigation schemes, investing big money in irrigators and more stock that they can’t keep alive without substantial irrigation, and imported feed like palm kernel expelair (PKE). The spiralling input costs become a vicious cycle driving a focus on increasing production and ever more cows.

That’s one of many reasons why we have called for a moratorium on new large scale irrigation schemes.

We’d like to see the $1.6 million the Government recently threw at new irrigation schemes like the Ruataniwha dam used to boost the Rural Support Trusts, and help farmers deal with the stressful situation they find themselves in.  We need to shift away from the high input model to lower input, mixed land use, to more environmentally sound ways of farming, like organic milk production, that are more profitable.
This blog originally appeared in On the Land.

11 Comments Posted

  1. Special times, so new tricks required: State purchase of land, Sovereign Money and UBI, regulate banks and let them go through receivership as they fail. Australian Bank shareholders like Citi Bank are riding the tip of Satan’s surf board. Here comes the white-wash. Assets should now return to the people, not be resold to other banks that are also bankrupt.

    Bankrupt business assets, like farms, should be held by the nation. Not sold to”people” on the market, getting their “cash” from international QE bankster action… Even “honest buyers” are generally getting their money from inequality, at least indirectly. Time that bank ownership was also turned back to the people, slowly but surely. Why not arrest bankers like in Iceland. NZ is a small country, with relatively honest police, we’ve still good options.

    Westpac talk with propaganda like confidence, “we’re too big to fail”, thinking that the Australian middle-class will continue to bail them out. The four big Australian Banks like Westpac need regulating against… breaking up? Separate their international business (derivatives gambling) from there private banking? Private and cartel interests have the majority of our banks sown up, it’s not secret, see link:

    Positively though, the Australian Govt have lead by example on one occasion, see link below. They’ve shown the potential of the helicopter cash drop – giving to the people, not just buying private debt. NZ should take lead and take it one further; back Landcorp to buy land, and go strong with Sovereign Money, and UBI…

  2. The problem with having debt to service is that you basically have to do anything to keep money coming in to service that debt – look at the fracking situation in the US, producers selling at as little as a quarter of what it costs to produce oil. There is a similar feeling from the NZ dairy industry that if they weather this downturn then they can get back to the good times of higher prices. To some extent this is what Eugenie is saying too, make some changes to reduce the environmental impact, move output up the value chain and things will be better/ok.

    Pretty sound advice when assessed against traditional business wisdom/normal times. But we are heading well beyond normal times and there doesn’t seem to be anywhere to go within a normal business/economic framework. I’m sure the banks are stress testing like crazy hopefully learned a little something from 2009 so we might not have the big scary crash (and the punting of the real problems into the future again) but that doesn’t change the underlying road we might be heading down.

    If the international market for our dairy products is going to stay low (and I can’t see how it won’t) then we need a plan as a country to handle that without throwing more money and environmental resources at just trying to produce more and cheaper. This is of course alongside the fairly massive reduction in greenhouse gas emissions that the Green plan calls for in the sector.

    If the times are going to be outside the standard business/economic wisdom, crazy times even, then we need to go well outside the standard business advice/thinking.

    I don’t think that anything like just ‘bailing out’ farmers in financial difficulty is a good idea but I think that there could be a heap of options whereby farmers can be assisted by the state if they participate in locally formed cooperatives that let people start mixed use farming area/work on these areas and benefit from the results.

    Bringing together the ample land resources we have, communities and shared knowledge would have benefits all round. Pull in businesses along the lines of My Food Bag to distribute surplus produce/teach people to cook again and we could even get broader health benefits. Who knows, maybe if there was a political party who was working on ‘the future of work’ there could be some ideas around keeping people fed and gainfully engaged in producing something fundamentally essential with their time/efforts – knowledge and high tech is good, but at the end of the day, you can’t eat it.

    It’s going to be a hard sell to be talking seriously about fairly large numbers of people effectively going back to working together to produce the food they eat – but we either get in early and try to pull off some form of transition or we leave it too late and probably end up hitting each other with rocks and sticks.

  3. Duncan: The Reserve Bank has said that our banking system is robust enough to handle a severe diary downturn. Basically what they’re saying is we have some of the best banks around the world. So yes some dairy farmers are going to be doing this tough there is no doubt about it, But can the banks handle that, and how will the banks cope with all this?
    I’m joined now by Mark Steed, Head of Agribusiness with Westpac.
    Mark, what’s your reaction to what the Reserve Bank has said today, that all the banks are in pretty good nick to handle the downturn?
    Mark: I think the key point in the Reserve Bank report is that New Zealand banks are well placed to support farmers.
    Duncan: In terms of the implications from Westpac’s point of view, are you concerned about some of the lending on your books?
    Mark: Certainly all the banks understand the volatility in the agri sector as they undertake their own stress tests. We’ve done our own within Westpac and we’re well positioned to be able to support our customers as we go through this challenging cycle. The key point is that we make clear to our customers that they remain in constant contact and communicate openly with their banks and advisors. Ultimately it’s a partnership as we navigate through these challenging times.
    Duncan: Do you have your people around the provinces sitting down with these farmers saying hey we’re going to hold your hand through this rather than perhaps back in the old days when some of these guys went to the wall?
    Mark: Absolutely. We’re sitting down with our customers. Some are leveraged, some are moderately leveraged and we’re working through with them on a line by line basis on their accounts. We’ve seen what are discretionary expenses and to be fair the customer base is already very proactive on what they can cull. We’re seeing evidence of expense lines being reduced by 30-40% in some situations. Our customers in the dairy sector are being very proactive in scaling back in expense line that is far more relevant to today’s pay out.
    Mark: As with any business, it’s safe to say some businesses are otherwise highly leveraged, they’ve got different operating models and management techniques, so there will be some who are under more stress than others, and we’ll be needing to work through those.Duncan: Do you target different farmers with some of their exposure and say hey you have the issues, we’re going to work extra hard on you guys?
    There’s no question that there will be undoubtedly some failures in the sector, and that’s really a direct consequence of levels of debt and their operating systems. We want to again stress that it’s about transparency of communication that they find time to talk with their advisors.
    Having said that there are customers that we’re actively looking to acquire and we’ve also got existing customers who are excellent managers and we’ll be supporting them through the cycle.
    Duncan: There’s been so much talk recently about how some farmers who actually walk off their land, who do fold and get out of the business because they simply can’t handle the pressure, the stress, and financial debt of it all. What’s Westpac’s take on that? Shiromani Akali Dal
    Mark: Our take is that undoubtedly there is a lot of stress out there in the sector and that’s evident. We’re running initiatives with JK (Sir John Kirwan) going out and doing town hall sessions with people. But undoubtedly the stress gets to a number of dairy farmers, both at the milk shed and contractor level and we encourage them to be open and talk to their bankers and advisors. That’s really a last resort kind of issue where we otherwise see dairy farmers walking off the land; we do not see that as a fundamental experience or response to the current downturn.
    Duncan: And you guys are open to a phone call from the farmers saying hey we need to chat, can you come and see me? Are you open to that? Shiromani Akali Dal
    Mark: We’re not only open to that, we promote it. If we haven’t already spoken to our existing customers, we’d be welcoming a conversation with prospective customers, so we’re here and open for business.

  4. dbuckley is very predictable.

    I am, aren’t I: I call out the truth, even when it is inconvenient. If there is a single word you think I wrote is inaccurate, please do point it out.

    Oldlux, it may surprise you that I don’t really disagree much you say, even though it has almost nothing to do with this thead. Yes, (almost!) every government of the world has “pushed a free market policy for growth of GDP”. And for decades this model has, contrary to your assertion, improved the lot of our children.

    The model has downsides, of course; the short version is: “we’re fucked”. I got that decades ago, and in fact have been stating this for a long, long time. it’s obvious: infinite growth cannot be sustained in a finite world. The core problem we face is population, and we are almost certainly going to have to fix that. So, as an exercise, you might like to consider how the world can be divested of a billion or two (or probably three of four by then) people before 2100.

    The bottom line is that people don’t want to hear about doom and gloom scenarios. Are you old enough to remember Ronnie Reagan sweeping to power, undoing all the steps taken in the right direction by Jimmy Carter? “Positive” and “me” is what the people want, and thanks to democracy, that is exactly what they are going to get. Democracy is quite a scary way to decide the future of the planet.

    However this has very little to do with the topic of this particular thread, which is the story of what happens when within the framework of of the existing economic system, people get it wrong. In this thread Eugenie is trying to take a cheap shot at the government, to obfuscate and defect blame from where it should sit. There are plenty of other enterprises who make good money, export stuff, give people jobs, and don’t wreck the environment (or, perhaps more accurately, wreck it less), and have a planned and reasonable strategy for long term existence. And then there is the enterprise that exports milk.

    You can abuse me all you like, but abusing me doesn’t alter the facts, ad hominem attacks rarely do.

    My nagging, real, long term problem is that I have still yet to determine how much damage the Green Party cause, and whether they actually do more harm than good. I’d encourage you to have a think about that too; as a recent example check out the thread The Mother of All Rivers, which is another example of the Green Party favouring CO2 emitting thermal generation over hydro. What kind of an environmentalist would support that?

  5. dbuckley is very predictable. The Government has pushed a free market policy for growth of GDP (which means little) for years and farmers owning property, banks, academic farm leaders, corporate farm suppliers, have capitalised the returns in how our system works. This model of economics has only succeeded by damaging the future of our children. I think in a decent society the future of all is a consideration, and I think the people of the world have let these so called leaders con them into believing in a model projected on television as an urban, material, consuming society with little reference to the ecological, economic, or even scientific realities. What has been lacking in this model is the limits of the planet and ecosystem to support this process so in this fact the current leaders are nearly criminal in their ignorance of things, I see more and more academics joining the Green process and a large proportion of younger thinkers. The rest are in denial. Thanks to the Green MP’s for rattling the complacent who are remaining uninformed. dbuckley, if you don’t see the benefit of getting the public to rethink, then you will suffer the consequences of seeing climate matters – a limit to our ecology of air production – taking all markets away. I want to see leaders trying to turn away from that disaster. Am I hoodwinked by thinking that this caring is leadership – NO WAY.

  6. Thanks Eugine, interesting detail.

    Our farm has been aiming for lower cost… we’re with you on this. Some of those NZ rural news-papers are so glossy they brainwashing doesn’t even light the fire proper.

    Agreed, some things in govt aren’t even being measured. How convenient.
    The Reserve bank doesn’t even offer valuations for farming, to compare with real-estate and other financial-assets. They to lots of fancy maths with dodgy data and fantasy for theory. Real-estate has more value than financial assets. But I wander houses are also worth more to NZ than farms?

    Reserve Bank cash should have be dropped from helicopters, some 5 years ago. Australia and NZ should be doing it in tandem, to keep up with the endless international QE. With negative interest rates, European banks are now paying people to borrow money! This is global financial end game. Never-mind the milk-price for a second, elephant in the other corner, the banks are insolvent!

  7. Disappointed with Eugenie piece here. It is, of course, natural for a Green party MP to blame the government for everything, but we don’t live in New Zealandstan; this is essentially a free country, in which the government does not pick winners, though it sometimes does just tilt the playing field a bit for influence to the benefit of specific industries.

    In addition, you’d have thought that the Green Party would have learned the lesson that Labour have learned the hard way; there is no point in blaming the government and Key, all it doers is further cement New Zealand’s loving relationship with our current leaders. The writing is on the wall: just look at all the mud that was slung at National before the last couple of elections; it had precisely zero impact.

    Worse than Eugenie’s mud-slinging and blame allocation in the government direction: it lets the actual blameworthy off the hook. Dairy is in a mess, and it isn’t a surprise to many people. Somehow, the unholy trinity of farmers, their co-operative, and the banks managed themselves into this mess. These are the people with skin in the game, it is their livelihoods, their businesses, so how and why could they, severally and collectively, misunderstood the dairy world view.

    Eugenie keeps saying “You can’t manage what you’re not measuring”, but it isn’t the government’s job to manage the dairy industry. That is the job of the dairy industry.

    Which brings me to another point. Education is definitely the government’s job. Eugenie keeps saying “You can’t manage what you’re not measuring”, and when the topic is education and the government, that must be bang on the money. Yet another Green Party MP, one Catherine Delahunty is rabidly against the concept of standards and measurement in the field of education. So I’m curious as to who is right: when one is responsible for a thing, Is measuring and managing a good thing , or not…?

  8. I hope everything is resolved for the good of sector and all farmers Forman Lo. The crisis is going to take Ahead the lives of many families to bring them to a miserable life.

  9. The Dairy slump is not in fact a crisis but an inevitable correction. We need to see this in how we approach matters. The dairy industry was ecologically out of balance, economically out of balance, and when we look at the consequences and winners and losers we see the issues. It is the buying in of the community into this modern farming method that is wrong. The individual farmers I have some sympathy with as the victims but it raises the question of whether they are skilled enough to be bailed out without some concession to the error of process. Big scale urban or foreign investors in the process I have little sympathy for as it raises the question of where they got their money from in the first place – similar projects? What of all the advisors and leaders of the industry that have encouraged this path, usually so they or their employers could make a buck on the side. As many of these are graduates it shows serious questions need to be raised in the academic world about the ethics of allowing these people the say they have had, while other methods with as sound theoretical possibility but less sexy dollar return get ridiculed or sidelined, eg. Homeopathy.
    The benefits of this type of economic growth go to the investors as the extra infrastructure costs raise interest payments, or give monopolistic control of the resources for human survival production. This is where the solutions have to be addressed. Community resources to help victims of the process need to be directed at shifting the economy away from growth economics based on burning fossil fuels and this downturn is an opportunity to look at this and show the public. Mixed farming methods growing other foods like nuts, or fibers to replace nylon and plastics are all beneficial to the climate balance, more surface area converting CO2 the better. Since a lot of this intensification was on marginal country, we can return wetlands to be filters with the crops we grow (flaxes for fiber), steeper land back to wilderness for the wild foods, and other slopes back to walnuts and chestnuts etc. Sheep can graze underneath. There are many working examples but for them to work, the land values can’t be maintained and the finance market has to take the losses. Selling to foreign buyers to do intensive farming of another kind makes no sense for the long term.

  10. Dont have much sympathy for busineses that follow failed economic models. At the end of the day if i make STUPID business decisions and go flop then its my own stupid fault. ISNT IT! The fact is people want more organic products and as the hard work has already been done by the organic community whats the problem? Multi use farms are a way better option. In fact NZ farmland could also be over planted in tree species ie Redwood on a wide spacing and still maintain excelent pasture and crops. Am concerned about what happens to these failed farms though because it might just be GROWTH TIME for wealthy foreign investors! Dams work well for trapping water and are a good option and can also provide valuable multi use ie aqua culture,recreation etc. Long term keeping vast herds of cows etc will sooner or later create a methane problem in our atmosphere so cant really continue much longer can it unless of course we get a taste for RUSSIAN ROULETTE!

  11. Not unusually, I find myself of two minds about this.

    We are going to need flood control, hydro dams and irrigation more, just to maintain ourselves, as Climate Changes. Each dam is different and has different considerations, but my view of the expected changes in precipitation leads me to be far more tolerant of having more dams and controls over water flow available.

    The flip side of this, is the government’s asinine insistence on intensification and greater exports as a means of balancing trade. Its delusional expectation that the theory of Free Trade solves all, when there is no such thing as “Free Trade” and its assumption that unrestricted trade approaches the theory is even more wrong. It encourages us to be utterly dependent no foreign trade, 40% of GDP is its “target”.

    The economy is hollowed out and burned out and we make damned few of the products we depend on.

    The fact is that the CO2 price is going nowhere but up… in 15 years we may well be at $100/tonne, and that will increase the cost of shipping by close to 300%. Which will diminish trade by close to 75% as a result, and in the TPPA this is not even a consideration. In the pursuit of it, the fact that we are on the far side of a lot of shipping costs is ignored. The irresponsibility of the obsession with free trade for a small market on the far side of the ocean, is not comprehended. Roger Douglas did his work well.

    Most economists know this is bad. Most workers know it is bad. Most leading candidates in the USA know it is bad. Here it is worse but New Zealanders are sure it is vital.

    “It ain’t what you know that gets you into trouble, it’s what you know for sure that just ain’t so” – Twain

    So the things we depend on will become massively more expensive and difficult to obtain.. for our children.

    Yet I would not lightly oppose working to control flooding and drought. I expect future climate to be worse, and the tools our children will have to deal with it are the ones we build them now.

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