Dr Jacqueline Rowarth says income generated by milk and meat is not covering farmers' costs of production. Photo / Amos Chapple
Dr Jacqueline Rowarth says income generated by milk and meat is not covering farmers' costs of production. Photo / Amos Chapple
Opinion: Nobody wins if processors or suppliers are strong, but farmers are struggling, Dr Jacqueline Rowarth writes.
When banks declare record profits, it is natural for people to feel aggrieved.
The banks are using our money, so we feel annoyed that they appear to be keeping it, rather than dropping the costs of transactions and borrowing, to us.
In the rural sector, it isn’t just banks that are reporting profits, it is the processors – the dairy and meat companies that farmers supply, many of which are co-operatives.
It seems that farmers are surrounded by companies of different types making money while the farms are struggling with economic viability.
The problem for the farmer is that income generated by milk and meat is not covering the costs of production.
In March, economist Cameron Bagrie stated that “farm inflation is still running around 15 per cent, roughly double the rate of general inflation”.
His calculation was based on the farm expenses price index where interest rates (up 45 per cent), fuel (up 33 per cent) and fertiliser (up 28 per cent) were key drivers.
For dairy farmers, inflation was 17 per cent, but Fonterra’s Milk Solid payout dropped from a midpoint of $9.50 forecast in June 2022, to a midpoint of $8.30 in April.
Shareholders are questioning how that has been achieved and at whose expense.
In the meat sector, the schedule price is also being questioned, as various meat companies report high profits.
Analysis of the schedules suggests that a decade ago, the gross processor margin was around $2/kg. Now it is approximately double. Farmers would like some of those dollars.
In their defence, processors have been facing inflation in costs too.
During the Covid pandemic shipping costs escalated in a manner that is difficult to present meaningfully, but adding a zero is a start... (They have now dropped “93 per cent from the peak in September 2021″ and are roughly at pre-pandemic levels).
Dr Jacqueline Rowarth. Photo / Supplied
In addition, there were difficulties with staffing, isolation distances, transport and maintenance.
Farmers also experienced those difficulties, but working together, the various components of the primary sector kept the country going. The milk companies were able to pass on profits when prices were high, and farmers were able to pay down debt. In contrast, beef and deer farmers are still struggling. The downturn in lamb prices this year is adding to the problems.
It is natural that questions are being asked in the farming community about whether Co-operatives should be considered profitable if shareholders aren’t profitable.
Farmers don’t want to be told that their processor is in a strong position if there is no strength left on the balance sheets of shareholders.
Fonterra is clear about its strategy. It is trying to show extra value through the earnings per share, currently forecast at 55-75c, and has increased the advance rate schedule (the proportion of the season’s milk price paid to farmers each month) to help with on-farm cash flow.
This strength also keeps Fonterra in the A band credit rating, which means that the interest rates paid are not as high as they otherwise might be – which in turn has benefits for farmers in that money stays with the co-operative rather than going to the banks.
However, banks are facing issues as well.
KPMG’s head of banking John Kensington has explained that they are extremely large corporate entities, and it is no surprise that their finances reflect that.
However, measured based on the return on equity or assets they lagged many other big companies.
“If you take the return on assets they’re at the very low end of the scale, and if you take it on return on equity they’re in the bottom quartile.”
On those two measures, they’re not seen to be performing strongly.
Meanwhile, the debate about windfall taxation continues.
Speaking on Q&A in March, Massey University’s Associate Professor Claire Matthews said that it is important to remember that banks do fail and that it takes a couple of years of recession before the banks actually feel the effects.
“Banks make profits to get them through the bad times.”
Listen to Jamie Mackay interview Dr Jacqueline Rowarth on The Country below:
The question remains “How do businesses decide when a bad time exists?”
There is no debate that the Agri sector, from farm through to processors, needed to pay down debt and invest in technologies to improve future efficiencies.
However, nobody wins if processors or suppliers are strong, but farmers are struggling - farmer balance sheets represent over three-quarters of the value in the sector.
Now is the time for all companies in the primary sector to revisit their margins. The drop in freight costs should be part of the calculation.
The line between gouging and building a reserve is not easy to see from the outside. In contrast, it is very easy to accuse farmers, supermarkets, processors and banks of taking more than their fair share.
Work needs to be done to restore confidence across the sector – from farmers through to all bank customers.
Companies rethinking their margins will be a start.
- Dr J.S. Rowarth, Adjunct Professor, Lincoln University, is associated with farms purchasing from and supplying to co-operatives. She is also on the board of directors of DairyNZ, Ravensdown, Deer IndustryNZ and NZ Animal Evaluation Ltd. The thoughts and analysis presented here are her own. jsrowarth@gmail.com
