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Friday
Dec302016

A Dairying Message For 2017!

Today’s NZH contains very interesting article by rural business reporter, Jamie Gray. He quotes the Feds Waikato President Chris Lewis who says:

"The ‘pasture first’ message expounded by Dairy NZ has been taken on board, but that feed supplements still had their place as a "top up" when the weather turns bad.”

On the other hand, he quotes Mark Heer, ASB Bank's general manager for rural banking:

"In times of difficulty, it always comes back to our competitive advantage - and that's the grass-based model. At the top of the cycle, the tendency has been to move away from it."

These messages are not mutually exclusive, even if they sound contrary at first glance.

According to Gray, ‘pasture first’  has been a key theme of Heer's meetings with farmer groups up and down the country.

“The growth in supply simply could not continue. As the world's biggest dairy exporter, what happens with New Zealand production has a large bearing on the world market.

“Local supply was skewed by the fact Fonterra's record high milk price of $8.40 in 2013/4 meant the deferred payment of $2.00/kg carried over into 2014/15, when the milk price was just $4.40.”

“It meant that farmers did not really feel the full brunt of the downturn until the second year of the slump, when the milk price dropped to $3.90.

“In other words, the appropriate supply response did not happen as quickly as it should have. We need to be careful that we don't get caught in that again - we don't know if there was enough conversation around it!’

There is a very strong message in that, and it is is the very nub of the matter – our farmers demonstrated unwillingness to accept the early signals that were there for all to see, and greed continued to determine behaviour – just talk to the purveyors of marine equipment and luxury items that suffered no downturn in sales until well into the downturn in dairy prices.  

And likewise, talk to the rural real estate agents who noticed little adjustment in real estate prices. Everyone of Jamie Gray’s informants is lauding the fact that receiverships and bankruptcy’s were kept to the absolute minimum, but these in themselves are market indicators, and hugely important in rapidly correcting otherwise irrational behaviour.

And this meant that banks were never required to take the rinsing that should have been the consequence of their demonstrable over-lending that resulted in 20% of farms accounting for 50% of overall dairy debt, and dairy debt accounting for 10% of all debt in the NZ financial system.

It is hard to claim that lessons have been learnt simply through the temporary anxiety suffered by farmers when farm prices are held up artificially, and for their own self-interest by these same banks.

They know, and we know that far more farmers saddled with unsustainable debt should have gone to the wall, and land prices adjusted accordingly.

These farmers will continue to struggle, even at $6.50, and nothing lasting will have been achieved other than the preservation of the banks’ balance sheets.  

As Mark Heer notes rather unconvincingly:

 “There was an elevated level of conversation between the farmers and their banks during the downturn. If you were a new contract milker or sharemilker, or it was your first year on the farm, then the last two years would have been devastating,"

“We think that if farmers had not received that big deferred payment in the first year, then that would have shown up in their bank account and the production response would have been quicker," he said.  

Given the experience of the last two years, Federated Farmers' Lewis hopes that the pattern has changed.

"I would like to think that it has," he says. "But with human nature, who knows?"

We would all like to believe that farmers’ would demonstrate greater market knowledge and rational response, but I think we all realise that that while hope springs eternal, that is futile. Chris Lewis’s “human nature” is after all simply greed by any other name. And if and when  the base Fonterra price rises above $7, a rise in the consumption of supplements, and production will follow like night follows day.

From an ecological standpoint, the problem with increased productivity from the same area of land based on supplements is that it is inevitable that there is another far more concerning lag in the ability to treat the resulting exponential rise in nitrogen and other effluent levels entering our rivers.

Economists and bankers may worry about increased production that results from irrational and counter-intuitive behaviour following perceived market signals. The future of our rivers should be a far greater concern to all of us - let that be the message for 2017.

 The anxiety of farmers that agitates the Feds should not be our primary concern by any means – let them learn, and behave accordingly, and let there be greater leadership shown by Fonterra and Fed leaders rather than falling back on the "human nature" mantra.

 

 


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