9 Mar 2016

Dairy land price drop expected

3:06 pm on 9 March 2016

A Real Estate company remains upbeat about dairy land prices but says it is expecting a knock-on effect from a low Fonterra payout.

Dairy giant Fonterra yesterday dropped its forecast milk payout from $4.15 to $3.90 for this season - its second downward revision this year.

The Reserve Bank has previously said under a severe scenario the milk payout would fall to $4 and, if it did, farm prices could fall by about 40 percent in the next two years.

Harcourts national rural manager Tom Rutherford said falling dairy prices would eventually have an impact on land prices.

"I think realistically there would have to be. Farming in New Zealand, as it always has been, is a business but it's now a multi-million dollar business. The farmers and their advisors are running big businesses and to have a business running below economics and below operating costs can only go on for so long," he said.

"They've had it pretty hard now for a good 18 months, if not two years, and there's an indication there's a third year possibly coming along and there's probably very few businesses that can operate like that for that period of time."

Finance Minister Bill English told Morning Report land prices would almost certainly begin to fall as a result of the dairy downturn.

"I don't think there's any doubt that this is an industry that they've had a focus on growing equity and growing land values for quite a long time now. It's going to be a significant adjustment getting back to the core business of effective farming for cash flow. They are going to see land values drop, I think that's pretty much certain."

However, the industry and banks would work their way through it, Mr English said.

But Devon Funds Management fund manager Paul Glass was not so optimistic because of the level debt across the sector.

"You've got about $37 billion of debt as of June last year owed by the farmers. That's probably increased to $40b now with capitalised interest costs and the losses that they've incurred.

"Sitting on top of that you've got Fonterra itself, which is in our view quite heavily indebted, with about $7b of further debt. So across the sector you've got about $47b of debt and this year total sector earnings are going to be somewhere between negative $1 and $2b, so those figures are concerning."

The industry was heading for a serious crash, unless there was a strong recovery in dairy prices, he said.

"The banks will be anxious not to effectively force land prices down, which impairs their own security, so they'll be taking a gradual approach to this and hoping dairy prices recover. If we get another one to two years out, what we'll start to see is a lot more forced sales from the banks."