The country’s biggest farm lender ANZ Bank says some customers are seeking to put off debt repayment, as lower farmgate returns and rising interest rates and costs put big question marks around cashflows and working
Debt repayment off table for farmers this season as agri-economy pressure builds
ANZ business and agri managing director Lorraine Mapu says lower farmgate returns and rising interest rates are creating some challenges. Photo / Supplied.
Loans to dairy farmers made up $37.2b of total lending as at June, compared to $36.7b in May, and $36.6b in June 2022, Reserve Bank figures show.
Dairy farmers were shocked when industry farmgate milk price setter Fonterra recently dropped the mid-point of its forecast range for the 2023-2024 dairy season by $1/kg milksolids, from $8 to $7.
They’d been expecting the company, which collects around 78 per cent of the country’s milk, to reduce its forecast in response to falling global market prices, but the depth of the mid-point fall threw already-tight budgets into disarray.
Fonterra farmer-shareholders will be able to offset some of that shock with a scheduled capital repayment from Fonterra later this month and a solid forecast dividend, but sharemilkers and farmers who don’t supply Fonterra won’t have that wriggle room.
Meanwhile, modelling shows debt servicing for the average Waikato-Bay of Plenty dairy farm will increase by 20 per cent in the current 2023-2024 season.
This year total debt servicing for the model increased by 45 per cent compared with the 2021-2022 season, according to a recent report on the model by agricultural economist Phil Journeaux, for the AgFirst consultancy.
The Waikato-Bay of Plenty Dairy Model represents around 3900 dairy farms across the two regions. The model is a seasonal supply farm based on an average property of 133 hectares, milking 368 cows and producing around 135,000-145,000kg milk solids in a normal season.
Journeaux expected many farms to suspend principal repayments in the wake of the recent forecast payout slide for the recently started new season and as a result of an expected fall in the final payout for the 2022-2023 season which ended in June. Fonterra’s final payout will be announced later this year. Farmers were hoping the final payout would be $9-plus/kg, but it is now expected to be around $8.20.
The budgeted breakeven payout for the current season was $8.17, and $8.28 for the 2022-2023 season, the report said. The slight decrease in breakeven point for the current season was due to “below maintenance” farm working expenditure and no tax being payable.
Journeaux’s report said the expected final payout drop, combined with ongoing cost increases and “rapidly rising” interest rates would result in the model farm running at a loss, only partially offset by the Fonterra dividend, this year.
The situation deteriorated further in the current 2023-2024 season, it said.
![Fonterra unnerved farmers with its $1/kg milksolids forecast payment drop recently.](https://www.nzherald.co.nz/resizer/v2/KCUUYYU6Y5PNCSLEA57O33FX4I.png?auth=960084021b88b5783cfaec0cfbdf21a852718722569ec431196174a2cfcf7713&width=16&height=12&quality=70&smart=true)
The continuing increase in costs was of major concern as it reflected the ongoing on-farm cost of inflation which over the past five years had run at more than twice the level of the consumer price index.
“Added to this is the rapid rise interest rates, which is taking a significant bite out of available funds. The model is carrying an average debt of around $22/kg milk solids. If this debt was in the upper quartile, of say $34-$35/kg, then debt servicing in 2023-2024 would be 39 per cent of net cash income, which would render the farm financially unviable,” the report said.
The ANZ’s Mapu encouraged farmers to complete their forecasts for the next few years and get in touch with their banks “sooner rather than later if support is required”.
She said while farm costs had risen in a short space of time and farmers had had to adjust, many ANZ customers had paid down significant amounts of debt while interest rates were low, while investing in their farms.
“This will ensure they remain resilient in the coming months.”
Andrea Fox joined the Herald as a senior business journalist in 2018 and specialises in writing about the dairy industry, agribusiness, exporting and the logistics sector and supply chains.