Farm Debt Levels Pointer To Financial Pain
January 19th, 2009
The reign of easy money has come to an end, and this is likely to mean the run of unsustainable rises in land value will stop. A complete change in valuing farm profits will be needed if farms are to remain competitive and viable.
Ex-banker and FedFarmers’ meat and fibre head, Bruce Wills, is predicting farm values could slide 20-30% as farm debt levels jump to more than $40bn with the average dairy farm debt standing at $1.85m. Wills is concerned debt fuelled increases in land values far outstrip the cash values being made on farms.
Wills says despite not foreseeing the sudden jump in dairy returns over recent years, the prospect of improved profits only saw returns capitalised into even further land price increases rather than banked as improved cash profits. He says this has been an age old problem with NZ farming. But he says it is typical human nature to translate the prospect of better returns into higher land prices.
Wills says the combination of such behaviour and easy credit is coming back to haunt the rural sector with high levels of debt combining as a dangerous mix with high input costs and falling margins at least in the short term.
The danger posed by excessive debt loading is concentrated disproportionately in the hands of just 20% of farmers with only 2600 farms each likely to be in debt to the tune of $7.6m on average. With the majority of conversions having been larger farms, a 300,000kg MS conversion could be facing an interest bill alone of $600,000 a year. With total operating costs on some farms approaching $6 a kg of MS and with some predictions the payout could slump to less than $5.50, this could spell big problems for many large recent dairy conversions.
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