OPINION: Reporting of Fonterra’s $6.55 (a kilogram of milksolds) payout for the year just ended told us $3.5 billion extra will be injected into the economy this year. But this is a common error that assumes farmers are masters of their own bank accounts.
In fact, much of the money will go not into the New Zealand economy but into Australia, owner of the banks that hold most farmers’ debt repayment promises. (Actually, the money will not stay long in Australia either, but travel on to the multinational investors who own the banks.)
The banks have taken a hard line with many dairy farmers as the payout has languished in recent years, mostly allowing their debt to grow but imposing strictly enforced conditions. For some, it has been like being a child again, their every move under the watchful eye of stern parents.
With the milk price forecast to go to $6.50 (plus 45-55c dividend) this year, the banks will demand – no, take – the money loaned to get farmers through the recent tough years, plus interest, of course.
This isn’t an attack on the banks. This is normal business practice and perfectly acceptable. In my view, the banks have acted responsibly over the last few years, making an effort to avoid forced farm sales, except in extreme cases. Without this, the dairy industry would be in ruins. Of course, the banks were also protecting their investments.
My point is that it will be a few years yet before the New Zealand economy will feel the full flush of a return to dairy farming profitability, and that’s assuming the present buoyancy will continue – an assumption it would be rash to make.
Another draw on the $6.55 payout (made up of a milk price of $6.15 and a 40c dividend) is the repayment of a loan from Fonterra, made 18 months ago to tide farmers over the worst of the slump. Once the payout goes over $6, Fonterra withholds the extra, and this will affect 75 per cent of the co-op’s farmer-shareholders who borrowed a total of $373 million.
Fonterra has promised not to take all of the money this year but to spread it out over two years.
Going by DairyNZ’s statistics, the level at which farmers can expect to break even this year is $5.40 (after farm working expenses and debt repayments). The “profit” or cream above this will already be spoken for – upgrading plant, machinery, animal genetics and pastures that have been put aside in recent years and on stream planting and wetlands.
It doesn’t leave much for frivolities like an overseas holiday or a new car.
No, it will be a while yet before we see a dairy-fuelled surge in the economy.
But that is not to say farmers are grim-faced. They are delighted to be able to put the worst of their debt behind them and to restore their farms to tiptop condition. More than that, they have a burgeoning feeling of confidence, an optimism that they are over the worst and that good times are coming.
That is worth more to them than money in the bank.
Jon Morgan is editor of NZ Farmer
By: Jon Morgan