Academic foresees shake-out in dairy sector

Professor Stuart Locke of Waikato University

The slump in rural land prices may have serious consequences for dairy farmers' balance sheets and their capacity to manage debt, says a Waikato academic.

It will also have implications for the next generation of farmers, said associate Professor Stuart Locke of Waikato University's management school.

Prof Locke is speaking at the national agricultural expo at Mystery Creek tomorrow on the possibility that a bulk commodity dairy model driven by continual cost reductions is not the best path to the future.

"Perhaps we should start exploiting our pasture-fed green image, recognise regional differences, and start selling our product on appellation," he said.

In the wine sector, the greatest value-add came from marketing fermented grape juice as chardonnay, sauvignon blanc or riesling, rather than in a generic cask of white wine.

Prof Locke said Fonterra's forecast 2010 dairy payout of $4.55, meant a typical Waikato dairy farm with 100 per cent equity can expect an annual surplus of just $40,000-$50,000 - "and that's where you own everything on the property".

Once mortgage finance costs were added, the situation became "dire".

"On a $6 million farm, servicing $2 million worth of debt at 9 per cent will cost you $180,000 a year - that's an overall loss of $130,000," he said.

Until now, farmers had been willing to "wear" such losses.

"It's a long-established tradition among dairy farmers that they don't make a profit," said Prof Locke.

"The return on assets was a negligible 2 per cent, but the appreciation in land prices had been significant.

"Now we're getting to a point where land appreciation just isn't happening, and that, coupled with growing problems in servicing debt could lead to a real shakeout in the sector."

The latest monthly figures showed farm sales were just one-third of the figure for last year, while the median farm price had dropped by nearly half.

With falling prices and lower mortgage interest rates, most landowners were sitting tight and waiting for prices to rise.

Prof Locke said Fonterra and its legacy companies had been "singularly unsuccessful" at increasing the value-add earnings from milk.

"In real terms, milksolid prices have not increased in the last 20 years but land prices have gone up several times," he said.

- NZPA