The average Waikato-Bay of Plenty dairy farm produces 125,000-130,000kg of milksolids a year.
The average Waikato-Bay of Plenty dairy farm produces 125,000-130,000kg of milksolids a year.
Dairy farmers who are coming up for air as milk prices recover, are now being asked to pay back $5 billion in bank support loans made during the slump.
Coming on top of increasing regulatory and compliance costs, and being beaten up by the public over environmental issues, the pressure from bankers to reduce hefty overdrafts and control working expenses is taking a toll on the industry's morale, say dairy leaders.
And the sector's books will come under more financial pressure in the next five to 10 years from regulatory demands, expects the country's biggest rural lender, ANZ Bank.
"We do see there will be more capital needed to go into the industry's transition to better farming practices as regulations are clarified and investment made to support that over the five to 10 year period," said ANZ managing director commercial and agri, Mark Hiddleston.
"Let's repair the balance sheet now so that when that regulation is defined and clarified, we are in a position to support it. It's good planning. It has been a tough three years ... and as you come out of tough times, the conversation then moves to OK, what are we going to do to repair your balance sheet?
Specialist dairy accountant Nigel McWilliam, of Diprose Miller, said some of the Waikato's top dairy farmers were questioning why they were still in dairying.
While it was prudent for farmers to work on debt reduction, and for banks to want them to create a financial buffer against the next cyclical downturn now the milk price had recovered, the pressure on farm cashflow was relentless, said McWilliam.
"It's a constant battle. They've struggled for more than two years and now there is some breathing space they are still restricted on cashflow. It affects their family time and some have staff earning more than they do, and they're getting [public] flak in the media.
"Some really good operators are questioning why they're in dairying. They're exactly the people we don't want to lose. Some farmers have options but some are stuck."
Federated Farmers dairy section head Chris Lewis said dairydom was "subdued".
The "conversation" between farmers and their banks had changed in the past six months, he said.
Between the financial pressure, the vagaries of the milk payout and weather extremes, even the most positive farmers were being "worn down".
The slump in milk prices paid to farmers as a result of a downturn in world prices ran from 2013-14 to 2016, immediately following a record high in the milk price payout.
It also came on the heels of more than a decade of expensive conversions from forestry and red meat-growing land, as the milk industry chased rising export market prices and its leaders encouraged production growth.
The Reserve Bank, in its latest Financial Stability Report late last year, said bank lending to the dairy sector in the downturn had increased by $5b or 15 per cent, mostly to fund farmers' working costs. Farms had also borrowed $400 million through downturn loans offered by industry heavyweight Fonterra to its farmers.
At $41.1b in September last year, bank lending to the dairy sector accounted for 10 per cent of total bank lending.
Dairy sector debt - seen by the Reserve Bank as a domestic risk to New Zealand's financial system, along with housing market vulnerability and the commercial property sector - was estimated by the central bank to be more than three times income, compared to a debt-to-income ratio of around two for the sheep and beef sector.
However, the bank was encouraged that the share of dairy lending on interest-only terms had declined since late 2016, and bank lending grew by just 0.6 per cent in the year to September.
Agriculture consultancy AgFirst suggested the price slump and its effects wiped $1.3b from the economy of the Waikato, New Zealand's dairying capital, in the 2015-16 season.
The average Waikato-Bay of Plenty dairy farm produces 125,000-130,000kg of milksolids a year.
McWilliam said the milk price slump had resulted in debt of $2-3 per kilogram of milksolids over the downturn for many farmers.
Dairy NZ chief executive Tim Mackle.
The milk price fell as low as the $3/kg range. The current milk price forecast is in the $6-plus/kg range as a result of improved global prices.
The ANZ's Hiddleston said some dairy farmers still wanted to expand through acquisition. While the bank was encouraging balance sheet "repair", it was not actively worried about farmer debt.
"We are very comfortable where it is. It's not as if we are sitting here worried and feel we've got to act on it. These are essential conversations [we're having]. It's sensible lending and good practice. Also ... the industry itself is at a level of maturity now where it is looking forward to the next 10 years."
The bank was watching developments in environmental regulation and while it concluded more capital would be needed to fund improved farming practices, no figures were yet available on the costs farmers might face.
"Con Williams [ANZ economist] and I are really looking at some of these things now but we face a lot of local requirements not yet clarified, so it's really hard to say it's going to cost you this, without knowing what we are aiming for."
Tim Mackle, chief executive of industry good organisation DairyNZ, said he heard anecdotal reports of financial pressure building among farmers.
Dairy farming was now all about profit from cashflow, not capital gain and farming in a sustainable way, he said.
"Yes, it is very important for farmers to think about what this is going to mean in terms of competitiveness and profitability. But there has already been a huge investment by farmers. A survey we did about 18 months ago showed farmers had spent more than $1b on effluent systems.
"But of course it's not all about effluent infrastructure. It's about how you farm under limits. The vast majority of farmers are already on the journey of system change."
For him, said Mackle, the challenge wasn't about the need for more farmers to raise more capital, it was about them focusing on cashflow.
"That means making a profit when milk prices are good and breaking even at least when prices are low, while making changes to farm sustainably. Capital comes after that. I prefer we focus on building resilient farm businesses and [deriving] more cash from them."
Studies of top farmers, some of whom had made a profit in the downturn, had shown they applied tactical and strategic planning across their whole business.
And a study in south Waikato had shown that getting professional advice for a cost of $2000-$3000 had yielded profit improvement of $50,000 to $60,000 a year.
To put the dairy sector's economic contribution and debt into context:
• It produces18 per cent of total goods and services exports • Dairy exports were worth $12.4b in the year ending June 2016 • The sector employs 49,000 people • It produces 21 billion litres of milk a year
New Zealand's second largest dairy manufacturer and exporter, Open Country, believes the country's annual milk growth is flatlining and that annual production will not go much higher due to environmental and market forces.
DairyNZ supports that view, with senior economist Matthew Newman forecasting annual growth of 1-2 per cent, compared to the steady 4 per cent annual growth of the past 20 years.
