Notice: Function _load_textdomain_just_in_time was called incorrectly. Translation loading for the jetpack domain was triggered too early. This is usually an indicator for some code in the plugin or theme running too early. Translations should be loaded at the init action or later. Please see Debugging in WordPress for more information. (This message was added in version 6.7.0.) in /mnt/stor08-wc1-ord1/694335/916773/www.tvhe.co.nz/web/content/wp-includes/functions.php on line 6131

Notice: Function _load_textdomain_just_in_time was called incorrectly. Translation loading for the updraftplus domain was triggered too early. This is usually an indicator for some code in the plugin or theme running too early. Translations should be loaded at the init action or later. Please see Debugging in WordPress for more information. (This message was added in version 6.7.0.) in /mnt/stor08-wc1-ord1/694335/916773/www.tvhe.co.nz/web/content/wp-includes/functions.php on line 6131

Notice: Function _load_textdomain_just_in_time was called incorrectly. Translation loading for the avia_framework domain was triggered too early. This is usually an indicator for some code in the plugin or theme running too early. Translations should be loaded at the init action or later. Please see Debugging in WordPress for more information. (This message was added in version 6.7.0.) in /mnt/stor08-wc1-ord1/694335/916773/www.tvhe.co.nz/web/content/wp-includes/functions.php on line 6131

Warning: Cannot modify header information - headers already sent by (output started at /mnt/stor08-wc1-ord1/694335/916773/www.tvhe.co.nz/web/content/wp-includes/functions.php:6131) in /mnt/stor08-wc1-ord1/694335/916773/www.tvhe.co.nz/web/content/wp-includes/feed-rss2-comments.php on line 8
Comments on: A view on debt in the dairy industry http://www.tvhe.co.nz/2014/01/10/a-view-on-debt-in-the-dairy-industry/ The Visible Hand in Economics Tue, 14 Jan 2014 09:14:00 +0000 hourly 1 https://wordpress.org/?v=6.9.4 By: Phillip Old http://www.tvhe.co.nz/2014/01/10/a-view-on-debt-in-the-dairy-industry/#comment-42601 Tue, 14 Jan 2014 09:14:00 +0000 http://www.tvhe.co.nz/?p=10493#comment-42601 Something worth noting is that the financial-sector-risk associated with an X amount of dairy sector debt is limited by the lands next best use. Even if there was a world wide ban on the consumption of dairy products, some form of revenue can be almost instantly and seamlessly be generated from the land through cropping and/or dry-stock farming … and with time, investment and ingenuity, the resulting land use could (I’m sure) be nearly as profitable as its current use. After all, our dairy country currently sits on our most prime, fertile and farmable soils. With the varied mix of ownership and debt levels in mind, this worst case scenario for the ‘dairy sector’ would not mean that all diary investors debt would become unserviceable. As such, though there is risk to the financial sector from falling dairy prices, the risk is even more limited than the impression conceived by looking merely at exposure to dairy sector debt.

A more direct and important point however, is that investors choosing to buy a dairy farm do not do so based on the current prices or ideal prices – rather an average (or some figure even lower than this) covering several years … and I mean SEVERAL. Yes, this does fly in the face of the truth that farm prices are strongly linked to commodity price fluctuations …. but bare with me: Most purchases of farms today are done by people who already have farms (making it a bazaar exclusive and ever limited club with other issues to be left for another day). When commodity prices go up, many dairy investors – while choosing wisely to budget and purchase on a realistic average expected milk price – have an additional bumper stock of cash, meaning more can enter the market. Therefore the effect on farm prices of commodity price fluctuations have more to do with the fluctuations in competition for land-on-the-market WHEN commodity prices are high, than an effect of investors-being-willing-to-pay-more because of higher dairy prices.

So, dairy investors make good financial decisions already, banks (knowing more than the reserve bank about dairy sector lending) lend on appropriate dairy sector price forecasts, and fluctuations in dairy commodity prices are not going to mean dairy farmers will be unable to service their debts.

I really want to get into arguments about the uselessness of LVRs, but I’ll stop at saying that the dairy sector is not a special risk to the financial system as a whole.

Boy did I have some sweet stats to back up my claims, or WHAT!!

]]> By: john small http://www.tvhe.co.nz/2014/01/10/a-view-on-debt-in-the-dairy-industry/#comment-42595 Thu, 09 Jan 2014 21:42:00 +0000 http://www.tvhe.co.nz/?p=10493#comment-42595 I generally agree. Dairy land prices seem to be very sticky on the downside, so I think it would take a large number of bankruptcies to induce a significant drop. Even then, I’m not sure this would represent a risk to overall financial stability – more like an opportunity for a new generation to get started.

That said, since getting into this game 5 years ago I have been a tad surprised at the amount of debt the banks are willing/keen to supply. Interesting also (but less surprising) that banks have no desire for the purchasers they are financing to drive hard/efficient bargains on land prices. They’d prefer to loan you a few extra 100k than to facilitate a sale that might set a lower benchmark which would erode the value of the other properties they are financing.

Just on feasibility though, even if complex ownership structures were a barrier to LVRs, couldn’t the RBNZ just implement any squeeze at the wholesale level via the risk weights in bank capital rules?

]]>