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Fonterra faces liquidity issues as rivers of “white oil” dry up

Written By: - Date published: 5:47 pm, March 8th, 2016 - 141 comments
Categories: debt / deficit, Economy, farming, john key, national, sustainability, tax - Tags: , , , , ,

Guest Post: by Simon Louisson

Pundits, most residing in the National Party, just three years ago predicted the economy would surf high on “rivers of white oil” flowing from the dairy industry, but they now have cow pats splattered on their faces as Fonterra today announced another payout downgrade and signalled liquidity pressures.

Fonterra’s move to demand 90-day terms from its 20,000 suppliers indicated the dairy giant is experiencing working capital and or cashflow problems, suppliers and shareholders said today.

“What is going on with their liquidity?” asked investment consultant Will Wilson who owns several dairy farms and is a Fonterra shareholder. “You have to start asking questions – how commercially sound is their business?” he told RNZ today.

He said the announcement that Fonterra has decided unilaterally to change its terms of trade to stretch payments out from the usual 30 days while also requiring suppliers to look for cost reductions of 10-20 percent “indicates there is pressure on liquidity”.

Fonterra Chief Financial Officer Lukas Paravicini told The Standard the price cut “illustrates the challenges facing New Zealand’s dairy sector and the pressure continuing low global dairy prices are having on our farmers’ businesses”.

Paravicini would not comment on whether the company was experiencing cash or liquidity pressures although he said Fonterra was on track to reduce its gearing (debt to equity) to 40-45 percent.

He said the move to the harsh terms of trade was in line with its “global standard” and ‘it is about being efficient as possible and driving as much cash back to our farmer as possible.

Fonterra’s announcement today that it is again slashing its farmgate price for milk by another 6 percent to under $4/kg of milksolids puts the industry into the “severe” scenario outlined in the Reserve Bank’s most recent Financial Stability report.

The cut to the farm payout to $3.90/kg of milksolids, down from the previous already dire forecast of $4.15, will put intense strain on the wider economy because of Fonterra’s position as the dominant exporter.

It also has serious implications for the Government books and places doubt on the National Party’s plan to cut taxes as an election bribe.

It also exposes the paucity of National’s economic policy of reliance on commodities such as dairy powder, logs and oil and its failure to support value-added industries.

One Fonterra supplier said Fonterra’s requirement for them to cut costs by over 10 percent was intolerable.

“It just doesn’t work. We are all struggling at the moment,” he told RNZ. “Loyalty is disappearing. A lot of contractors won’t give them the same loyalty and drop everything to help them out when their plant goes down because they are not good creditors.”

“Because they are paying three months late, that indicates that they have a serious liquidity problem. What guarantees do Fonterra give all their creditors that they are good to pay their bills on time?”

The supplier labelled Fonterra as “corporate bullies” who want to “beat up their little suppliers”, while trying to portray themselves as good employers.

Wilson said Fonterra was using its suppliers to provide working capital, but suppliers still had to pay their own suppliers on the 20th of the month following as everyone else in New Zealand does.

Fonterra made the spurious claim the move in line with overseas practice.

The RBNZ in its November Financial Stability report noted suppliers were already under serious pressure from losses experienced by most dairy farms last year due to the severely curtailed dairy price.

The RBNZ’s baseline scenario had the Fonterra payout at $4.15. Even in November, the RBNZ said 11 percent of farm debt was owed by farms with negative cashflow. Under its severe scenario, nearly half of all dairy farm debt – amounting to over $38 billion (up 26 percent in five years) – will become non-performing loans. Those loans will be concentrated in a quarter of dairy farms.

Prime Minister John Key said banks would be patient.

“They’re very much taking the view that they’re not going to rush to be forcing people off their farms, but inevitably there are a few that are going to be highly indebted.”

History would say that banks seldom exercise patience for long.

Debt soared during the dairy boom when the payout in 2013/14 jumped over $8/kg and people leaped on the bandwagon to buy dairy farms at inflated prices or paid high prices to convert forest and other pastoral land to dairy.

This week, the country’s largest farmer, Landcorp, announced it had abandoned a hugely expensive plan to convert land in the central North Island to dairy due to financial pressures.

The state-owned farmer forecast it would lose between $8-9 million in 2015/16 due to low dairy prices. It runs 17,000 cows on 6400 hectares on its 13-farm Wairakei Estate near Taupo. It had planned to run 43,000 cows on 39 farms by 2021.

Landcorp will also face serious cashflow pressure and will be forced by its banks, ANZ, ASB and Westpac, to sell assets at the bottom of market to repay debt. Last year’s Landcorp annual report showed its contracted capital for conversions would cost $35 million annually until 2019 and it then escalated to $229 million.

Landcorp costs before even debt servicing were up at at $4.82/kg of milk solids which is typical of the kind of poor economics of many of the recent dairy conversions.

At $3.90, the milk price is well below industry body Dairy NZ’s estimate break even at $5.25/kg.

Dairy prices rose marginally in the latest GlobalDairyTrade auction, breaking a run of four previous falls, but analysts see no immediate sharp recovery in prices due to over-supply from the US, EU and New Zealand combined with slacking demand from key consumer markets in China and Russia.

Financial analyst, commentator and Milford Asset Manager Director, Brian Gaynor recently noted Fonterra’s net debt has risen to $7.6 billion from $4.7 billion in 2011. That compared to farmer equity of just $5.8 billion and Fonterra’s own estimation of market value of just $8.9 billion.

Fonterra’s net interest bill in the latest year was $518 million.

Gaynor said that when Standard & Poor’s downgraded Fonterra’s credit rating in October to A-minus, it assumed a milk price payout of $4.60/kg. S&P then said Fonterra’s financial flexibility had diminished due to the speed and magnitude of the drop in global dairy prices relative to the level of advance rate payments to its supplier shareholders.

“This also resulted in a material increase in its working capital at balance date, which added to the already elevated debt levels from capital investment and acquisitions during the year,” S&P said.

It noted Fonterra’s recent offer of interest-free loans to distressed farms, “in our view implies there may be limited headroom to lower the payout at the bottom of the global dairy product price cycle.”

Gaynor commented that Fonterra shelled out $364 million in capital investment on China last year and said it may have too many balls up in the air at once. Certainly, the value of its $615 million investment in Beingmate as a “game changer” in the infant formula market in China would have gone well south and will be just one more pressure loaded onto its books.

Fonterra is due to announce its financial results on March 23. We await with interest.


 

Simon Louisson formerly worked for The Wall Street Journal, NZPA, Reuters and
was most recently a political and media adviser to the Green Party.

141 comments on “Fonterra faces liquidity issues as rivers of “white oil” dry up”

  1. BM 1


    It also has serious implications for the Government books and places doubt on the National Party’s plan to cut taxes.

    Works both ways, no free tertiary education.

    Looking past the political point scoring wankery, this is getting quite serious and has huge ramifications for NZ going forward.

    • weka 1.1

      No shit sherlock. Thanks National.

      • BM 1.1.1

        So what should have National done differently with dairy?

        • Colonial Viper 1.1.1.1

          Massive dairy conversions, skyrocketing farm prices and ballooning farm debt occurred under both National and Labour.

          That the bubble finally popped under National says nothing about Labour’s culpability.

          Both governments loved the boost that it gave the economy.

          Having said that, those Fonterra senior managers should be for the chopping block. Massive and well known South American, Indian, Chinese and Russian dairy farm projects were always going to add massive supply to the market.

          That they deliberately neglected to factor this in to their strategic plans is incompetence on a billion dollar scale.

          • BM 1.1.1.1.1

            True, but could National or Labour really do anything, it’s not like they can just charge on in and take over.

            Apart from trying to get as much diversification in our exports which both Labour and National has been working on there’s not much the Government can do.

            Perils of being a export driven country.

            • weka 1.1.1.1.1.1

              Had the government regulated land use for sustainability, and supported regional councils to do likewise and enforce that, we’d be in a very different situation now on many fronts.

              Are you saying that the NZ govt has no power to regulate to prevent boom and bust cycles? Why not?

              We’ve had a moratorium on GE, why not on new diary conversions?

              • BM

                Governments especially since the 1980’s prefer a hands off approach.

                The thinking seems to be that direct government intervention causes more problems than it solves.

                [lprent: *sigh* for Fonterra? The company with special legislation permitting it to form and subject to legislation as recently as last year?

                Another diversion away from the posts topic (see above and below). I can’t be bothered with having this here. Banned for 1 week. ]

                • Muttonbird

                  Bye, BM. What will you do during your week off? Do Youtube reruns of John Key’s major speeches?

                  • The Other Mike

                    Yeah – and maybe think of all the good things that could happen if they reversed a couple of the recent tax cuts. Make a list BM!

          • Keith 1.1.1.1.2

            I recall quite clearly National doing away with R&D tax credits when they came into office which was always going to kill diversity in research for Fonterra and others.

            Just like their idiotic removal of Kiwisaver start up incentives that Key promised “won’t make a blind bit of difference” that is actively discouraging Kiwisaver take up. Gee you can’t believe a blind bit of anything he says!

            National are fools when it comes to managing the economy!

            • Muttonbird 1.1.1.1.2.1

              The removal of Kiwisaver start up incentives is a deliberately stupid policy and has crippled further two generations of savers.

              • Mosa

                They have always hated Kiwisaver!!
                National have always flaunted their so called Expert economic managers label with encouragement from the MSM
                Labour has banged on about
                diversification for the economy for some years now
                with dairy in trouble it’s time we had a new approach
                National always governs for the short term and is compromised by its support base and vested interests

                • gnomic

                  Yes the rank and file Nats wanted Kiwisaver gone. The rentiers and comprador bourgeoisie. But Key knew he had to swallow the dead rat to win election since Ewen Mee (ie the NZ working class) were keen to have it, thereby showing their common sense.

                  comprador bourgeoisie

                  (Marxism) A section of an indigenous middle class allied with foreign investors, multi-national corporations, bankers, and military interests.

                • Draco T Bastard

                  They have always hated Kiwisaver!!

                  National hates the idea of the workers becoming independent from the rich and works to prevent it. They don’t like the idea of workers having money either because it means that they don’t have that money themselves.

                • Tautuhi

                  Like the management of Solid Energy etc etc etc

                  National are actually blind when it comes to economic management, I would like to know where the $110 Billion has been spent, we know $500 million went into a Chinese Infrastructure Bank and X $’s have gone into Saudi Arabian Sheep Farms what about the rest of the $’s?

              • Mosa

                Yeah couldn’t agree more MB
                Key has been irreponsible when it comes to super
                His retirement is sorted and he will be gone by the time NZ has to take drastic action in this area

            • Gavin 1.1.1.1.2.2

              Spot on Keith, R&D tax credits would have worked extremely well I think. National killed that Labour policy off, as one of their very first acts in 2008.

              • simbit

                Tax credits useful but any company that size should just invest in R&D as a strategy.

          • Chooky 1.1.1.1.3

            +100 CV…this crash was predicted by many about 10 years ago

        • AmaKiwi 1.1.1.2

          “So what should have National done differently with dairy?”

          National should have supported the development of manufacturing, which is the real basis of wealth. Now TPPA will make sure that can’t happen.

          Commodities and labor intensive service industries (like tourism) are what you do when you can’t make money any other way.

          Third rate. Third world.

          • Tautuhi 1.1.1.2.1

            Welcome to the Greece of the South Pacific or shall I say the Beijing of the South Pacific?

        • Stuart Munro 1.1.1.3

          Resigned.

      • Nic the NZer 1.1.2

        BMs framing of this is wrong (factually wrong not morally distasteful). You should not accept it. Its the same mistake Labour made in responding to the decades of deficits meme. The best response might well be a decade of deficits (which National may still reach) to support the economy through under spending and repair some of the decades of ideologically driven under spending on government services. If thats the case then rejecting the decade of deficits meme (and trying to compromise and balance the proposed budget) is already tantamount to giving up on the best course of action for the country.

    • lprent 1.2

      Sure. But hardly the point really. The point is that National are bloody awful managers of the economy. And Labour are not the government – National is.

      Opposition parties can only go off the books as and when they are revealed by the government. Typically this is not particularly transparent and often appears to be not particularly good advice as evidenced by the awful advice that resulted in predictions that previous tax cuts would be “fiscally neutral” when it was quite obvious that they were not (and proved not to be). They amounted instead as a transfer of taxes from the already affluent to the poor, and negative effects on the economy as a result.

      Of course if the National party would give more access to treasury advice and the ability to criticize Treasury projections with better information Labour would have a better idea on the risks. But since they don’t then Labour have to formulate policy based on the same figures that National say they are using.

    • Nic the NZer 1.3

      Wtf are you talking about. The correct response to a recession is for the govt to spend more not less. I expect even National will oblige. That makes tax cuts or free education more affordable not less.

      • AmaKiwi 1.3.1

        “The correct response to a recession is for the govt to spend more not less.”

        Only if you spend it wisely to make the economy more competitive and efficient. Not waste it on motorways that will be clogged with traffic the day they open.

        Why is there no public education program to reduce obesity? Where is our more efficient public transport system? Where is a chain of electric car refueling stations? Why are young people renting dumps while paying superannuation to rich retiree slumlords? What’s the benefit of TPPA destroying our small and medium size manufacturing businesses? Why have they spent nothing on public works projects to reduce the impact of increasing cyclones caused by global warming?

        • Nic the NZer 1.3.1.1

          No even if its not spent wisely its still effective. If you dont take up the unused slack in the economy caused by the slump its simply left to waste.

          • AmaKiwi 1.3.1.1.1

            “No even if its not spent wisely its still effective. If you don’t take up the unused slack in the economy caused by the slump its simply left to waste.”

            Complete rubbish. There is NO benefit, ZERO benefit, in giving money to a wealthy Saudi, building charter schools (when public ones are available), building motorways which produce ZERO traffic improvement, etc.

            Wasting money is not “taking up the slack.” Waste is waste.

            • Nic the NZer 1.3.1.1.1.1

              “If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again… the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing. ” – JM Keynes

              Unemployment where the unemployed person would rather be working if available is clearly waste.

            • Stuart Munro 1.3.1.1.1.2

              +100

              This is why African economies do not show massive growth stimulated by the elite corruption. NZ needs maximum bang for our buck – and we’re not getting it. It’s why Savage succeeded & Key failed.

              • Nic the NZer

                +1000000000000

                China is apparently massively corrupt and has had rapid growth. Maybe its the scale you have wrong in your straw man argument?

                • Stuart Munro

                  Scale of corruption as a % of economy – Africa’s economies are small. China’s economy is huge – less room for elite monopolising – and if it becomes too overt there is the death penalty.
                  But corruption is still a deadweight cost – always better without it.

                  • Nic the NZer

                    Incase you didnt notice i didnt create the strawman position which you are furiously combusting there.

                    • Stuart Munro

                      No – you’re just touting for corruption here – NZ is big like China or small like African economies? So no good to us.

                      Corruption doesn’t help however much you might wish it did.

                    • Nic the NZer

                      My first and only mention of corruption was in a facetious comment explaining how you were attacking an argument i never made (1.3.1.1.2.1). Remember to sweep up the ashes when your done with your bond fire there.

                    • Stuart Munro

                      Frankly you talk so much nonsense I don’t know how we’re supposed to keep track. Your fellow neo-liberals have tried to make the case for corruption, as I’m sure you know perfectly well.

                    • Nic the NZer

                      If your losing track you could try not making up things i didnt say for a start? Or not associating me with other peoples views i dont espouse. Just a suggestion of course.

            • greywarshark 1.3.1.1.1.3

              Amakiwi
              If you explained it as wasted opportunity I think it would convey your thought better. Is that right? People could be working, not despairing, if given jobs at a living wage at anything. That would be better than not spending on some project, which is what we have now, and a depression on the way.

              But if there were areas of managed projects, similar to the planting of the forests on the NI plateau in last depression. What a great thing. What about getting our arbourists establishing the best areas for large plantings of certain trees, especially in erosion prone areas? What areas are our national borer insects most prone in. They would know where is the best area for weather, rainfall, drought, and anti erosion. Then they could argue against the desire of the irrigators to dry up every last drop of our rivers and that trees upstream only reduced water availabilify for them. Less silt downstream would be a boon, in the short and probably long run.

              There would be some areas in native timber, some in our own hardwoods, some in foreign timber types, and a proportion in radiata, marked to belong to Landcorp so it wouldn’t be sold off for a quick erection in the national income when there was a time of accounting where a fall needed to be a rise so the books looked good.

        • Rob Painting 1.3.1.2

          Yes I’m being pedantic, but there’s little evidence to support the claim of increasing cyclone frequency due to global warming. However there is reasonably robust evidence that the warming of the planet is causing cyclones to become more powerful.

          • lprent 1.3.1.2.1

            Which is exactly what you’d expect to happen. More energy in the system gives bigger heat differences and higher frequencies of more powerful storms and everything that falls out of that – flooding, wind speeds, and even the speeds of storms.

      • Lanthanide 1.3.2

        Pity the government has already run up a $100B debt. Can’t be much headroom left.

        • Nic the NZer 1.3.2.1

          Loads of headroom. The govt faces no financial constraint only a real constraint. While people want to work for govt pay the govt can always afford them.

        • Craig H 1.3.2.2

          $100B is 50% of GDP, which is a reasonably low debt ratio, so there’s still quite a bit of headroom.

          • AmaKiwi 1.3.2.2.1

            “$100B is 50% of GDP, which is a reasonably low debt ratio”

            Spoken like a neo-liberal bankster.

            Since you think debt is good, send me your personal details so I can borrow $25,000 and have you repay it. $25,000 is the amount of government debt every man, woman, and child in NZ owes on that $100 billion.

            Debt is NOT good. It has to be repaid . . . somehow . . . someday.

            Kick the can down the road to the next generation, the ones with student loans who have no prospects of ever buying a house.

            Excessive debt destroyed Rome.

            • Nic the NZer 1.3.2.2.1.1

              “Excessive debt destroyed Rome.”

              Never mind those vandals…

              • Stuart Munro

                The grain corporations had plenty to do with it – using slaves to farm, making smallholders non-viable = not enough Roman youths for the legions…

            • Craig H 1.3.2.2.1.2

              “Excess debt destroyed Rome.” Key word there is excess. 50% of GDP is not excessive – 100% is the best current guess, but even that is up for debate.
              NZ is a sovereign country, with its own currency, not a business or household. Kicking the can down the road is not necessarily a bad thing because NZ is immortal, so can kick the can down the road forever – the US is still paying off Civil War debt, and that, by itself, is not actually a problem.

              If I wanted to sound like a neoliberal banker, I’d be decrying public debt, not embracing it. When interest rates are as low as they currently are, it’s an excellent time to borrow to fund infrastructure and better public services, which then boosts the economy, lowers unemployment and improves govt finances in other areas. When the economy is booming is the time for austerity measures and debt repayment, not when our economy is sliding backwards into the mire.

              • KPC

                Craig, NZ is not a sovereign country and any vestige of it being so will be gone under the TPP

                More info here –
                http://www.wakeupkiwi.com/new-zealand-corporate-government.shtml

              • Draco T Bastard

                NZ is a sovereign country, with its own currency, not a business or household.

                True.

                When interest rates are as low as they currently are, it’s an excellent time to borrow to fund infrastructure and better public services, which then boosts the economy, lowers unemployment and improves govt finances in other areas.

                And thus it has no need to borrow. All it needs to do is create the needed money and perhaps look at raising taxes to offset the increase in money in the economy or to run a deficit.

                The problem is the borrowing from the banks which creates money without an offsetting reduction of money into the economy.

                Of course, the private banks creating money every time they make a loan is also a major problem.

              • Tautuhi

                China currently hold 50% of the US debt, I wonder when that will be paid back?

          • Lanthanide 1.3.2.2.2

            As the debt goes up, the rating agencies will drop their ratings. This will make our existing debt cost more.

            It’s a downward (or upward) spiral. Best not to start.

            • Nic the NZer 1.3.2.2.2.1

              Yeah, i mean just look at Japan govt debt in excess of 230% of gdp, multiple credit rating down grades and their rates going…. WTF Japanese 10 year bond rates are paying -0.015%?? Lenders are paying the Japanese government to lend to them.

              http://bilbo.economicoutlook.net/blog/?p=33094

              Turns out your model of govt finances is contradicted by reality.

              • Expat

                Yeah, but their substantial global investments do counter this, something that needs to be considered, so not necessarily contradicted.

                • Nic the NZer

                  Yeah. I recon Japan is a special case because their country resembles a Dragon myself. Dragons are really cool you know.

                  • greywarshark

                    Ooh that dragon breath, hot stuff. Why are we comparing ourselves to Japan. They pulled themselves up by the bootstraps after WW2 with some help but mostly from their own determination.

                    We just kept on milking everything we had, and allowing business to drop away so we could follow the cargo cult economic theory of sticking to your knitting and giving the rest of enterprise away so we would import it instead. So we encouraged very unequal countries to sell to us at lower prices than ours and ruined our own internal economy. Those other countries could supply us cheaply and easily because of their opportunities for marginal profit.

                  • Expat

                    Tell me Nic, would you survive if your debt was 230% of your income?
                    Not many people or countries could successfully service this kind of debt, and for NZ, “kicking the can down the road” only leaves the problem to the next Govt and the next generation to fix.
                    Look at “why” there is a need to borrow so heavily, it all started in 2010, poor economic management and bad decisions, you’ll note the Au Govt rejected the idea of increasing GST and lowering income tax on the basis of it (after modelling) harming the economy, slower growth and higher unemployment, sounds familiar.

                    • Nic the NZer

                      “would you survive if your debt was 230% of your income?”

                      That would depend on if i could issue the money my debt was liable in or not. If i can then yes, like Japan or NZ or Australia then its no impediment to my continued spending. If no, like you or I then this could be a problem if my income fell to far or interest rates got to high. And if its like Greece or Spain or Germany then that would depend how good i was doing with my bankers at the ECB.

                      You can try this yourself. Setup a chore roster for your house. Everytime somebody does a chore they get a credit (like money) but at the end of every week you tax them (a minimum number of chores). So are you limited in terms of chores per week to how many you collect in taxes? Not if you issue your own chore credits.

                    • Nic the NZer

                      I have heard house prices start becoming excessive above 300% of median income multiples. So i answered your question just assuming some excessive sounding figure anyway. Figures in Auckland /Sydney are probably above 500% of income for many peoples debts.

              • Lanthanide

                1. Most of Japan’s debt is owed to its own citizens. Do you think NZ citizens are capable of stumping up $100B to lend to our government?

                2. Japan is the 3rd largest economy in the world. We simply don’t play by the same rules.

                Your reflexive “here’s an example of this working for country A” is pretty irrelevant when we’re nothing like country A.

                • Stuart Munro

                  Certainly Bill English couldn’t get a senior job in Japan’s finance ministry. They like competence. They also like to understate performance to discourage investment volatility – unlike Bill, who has to milk every miserable gleam of sunshine to look better than a total disaster.

                  My notional dog can’t balance a budget, produce growth, jobs, increase standard of living or health and well being. He’s just as good as Bill and only double dips on dog biscuits. And he doesn’t scream at burglars.

                • Nic the NZer

                  1. Most of Japan’s debt is owed to its own citizens. Do you think NZ citizens are capable of stumping up $100B to lend to our government?

                  Absolutely. The govt deficit increases dollar for dollar the non govt sector savings (by accounting) so as the govt spends more the savings are created to lend. The practice of govt borrowing is only actually there to keep the OCR rate where the RBNZ wants it as a surplus of funds in the interbank market puts downward pressure on the price of bank reserves. Same in Japan. You have the causality backwards Japanese have a high savings rate due to a history of their govts deficits. NZ has a low savings rate because of a history of govt fiscal responsibility.

                • Nic the NZer

                  A better discussion of 1) than mine.

                  “It may be asked where the public will get the money to lend to the government if they do not curtail their investment and consumption. To understand this process it is best, I think, to imagine for a moment that the government pays its suppliers in government securities. The suppliers will, in general, not retain these securities but put them into circulation while buying other goods and services, and so on, until finally these securities will reach persons or firms which retain them as interest-yielding assets. In any period of time the total increase in government securities in the possession (transitory or final) of persons and firms will be equal to the goods and services sold to the government. Thus what the economy lends to the government are goods and services whose production is ‘financed’ by government securities. In reality the government pays for the services, not in securities, but in cash, but it simultaneously issues securities and so drains the cash off; and this is equivalent to the imaginary process described above.” – Michał Kalecki

                  I got this quote from here,
                  http://bilbo.economicoutlook.net/blog/?p=33124
                  Stuart Munro should definitely read this.

        • Expat 1.3.2.3

          $120B, and look at WHY the debt is so high, all those in favor of TAX cuts, be prepared to double the debt, no country in it’s right mind would be so stupid in the current global economic environment.

  2. weka 2

    Does liquidity mean cash flow?

    The RBNZ’s baseline scenario had the Fonterra payout at $4.15. Even in November, the RBNZ said 11 percent of farm debt was owed by farms with negative cashflow. Under its severe scenario, nearly half of all dairy farm debt – amounting to over $38 billion (up 26 percent in five years) – will become non-performing loans. Those loans will be concentrated in a quarter of dairy farms.

    Can someone please translate that for me? Negative cashflow means outgoings are more than incomings? Non-performing loans means people can’t pay their mortgage? What is concentrating a loan?

    • lprent 2.1

      Negative cashflow = some farms are losing money.

      Non-performing loans = those farms are unable to pay the banks their interest because they have a negative cashflow.

      • weka 2.1.1

        So having half of all dairy farm debt being in that situation is pretty extreme right? How long can the banks sustain that?

        • adam 2.1.1.1

          It’s bad weka.

          The banks have a long history of wanting their money, no matter what.

          They also have a bad habit of getting nervous when they feel it’s all going to go hell in a hand basket.

          Key’s begging will only stall the banks so long.

          • BM 2.1.1.1.1

            Share holders first, banks aren’t charities.

            • AmaKiwi 2.1.1.1.1.1

              “Share holders first, banks aren’t charities.”

              Correct. The banks are multinationals with the political influence to make sure they are not too closely regulated so they can take $5 billion a year in profits out of NZ.

              Why does an overdraft on my credit card cost me 18% interest while my savings account at the same bank pays me less than 3%?

              That’s a nice profit if you can convince the government to let you get away with it. Ours does.

          • weka 2.1.1.1.2

            @adam, I remember the 80s when farmers had their land sold out from under them. I didn’t understand the economics at the time (was that subsidies coming off and mortgage rates jumping?), but it was clear that there was something very very wrong with a system that took traditional farmers off the land like that. Lots of family farms. And here we are 30 years later and it’s all about the $ now. I don’t know how much of this is going to hurt us where it really matters, with the land.

            • lprent 2.1.1.1.2.1

              We’d had unsustainable subsidies propping up sheep farms for a number of years which hadn’t allowed farmers to adjust to a basic change in their markets. I don’t think that wool prices have ever rebounded much from their low at the end of the seventies.

              You use subsidies on a temporary basis and as a padding for smoothing price changes. You don’t use them to try to maintain a industry on unsustainable expectations.

              The interest rates were a problem for everyone, but it was largely due to inflation. The ‘real’ interest rates (ie above inflation) were probably quite a lot lower than they are now.

              Inflation itself was an issue because of the time delays between payment and costs.

              But basically it was the continued long term drop in prices for wool and sheep carcasses that caused the problems you are remembering.

            • pat 2.1.1.1.2.2

              The parallels are frighteningly apparent….a rapid cash flow reduction that causes trading insolvency and the subsequent defaults (or forced sales) drive down land values creating a debt ratio issue for additional (potentially) viable businesses and all the servicing and support businesses associated and population drift…..a downward spiral…..and the subdued reinvestment in any further ventures due to institutional memory.
              Many provincial areas of NZ did not begin to recover from the removal of SMPs in the 80s until the new century…we could be waiting another 20 years for the next agricultural gold rush

  3. Simon Louisson 3

    Negative cashflow simply means, as you suggest, that outgoings are more than income, which eats into your capital (equity). And yes, non-performing loans are where the borrower can’t meet his/her requirements. The concentration thing means most of the NPLs are held within 25% of farms. If one bank has too many NPLs, it gets very jumpy and may not be as patient as Mr Key hopes.
    Simon Louisson

    • weka 3.1

      “Under its severe scenario, nearly half of all dairy farm debt – amounting to over $38 billion (up 26 percent in five years) – will become non-performing loans. Those loans will be concentrated in a quarter of dairy farms.”

      So half of all debt doesn’t mean half of all farms, it’s 25% of farms. That’s not as bad as I first took it. How long can banks sustain that?

      • Colonial Viper 3.1.1

        At the moment the banks can reassure themselves that the big loans that they made in 2008/2009/2010/2011 are still secured by high land values.

        The moment that farm values begin to fall, I think that the banks are going to run, not walk, to the exits.

        • weka 3.1.1.1

          Who will be buying the land at that point? Not predominantly NZers right? Or do you think land prices will drop far enough to make land affordable again?

          • Nic the NZer 3.1.1.1.1

            There is no reason i can see it wouldnt be NZers. But it will likely have to be a business with a likely return on their investment. This might reduce dairy intensity and in that sense may be a good thing, though that implies a transfer of occupation for some farmers.

            • weka 3.1.1.1.1.1

              By NZers I mean people not corporations.

              Transfer of occupation, what did you have in mind?

            • Stuart Munro 3.1.1.1.1.2

              Except for the shortage of liquidity in NZ due to the tanking economy. & If you had $20 million – would you put it in dairy, or in property? Not a difficult choice.

          • AmaKiwi 3.1.1.1.2

            “Who will be buying the land at that point? ”

            That’s not the critical issue. An Example: I am worth $1 million so I lend it to my friend/family to buy a farm. The farm goes bust. The land and everything is auction off for $700,000.

            I am no longer worth $1 million. I am worth $700,000. The other $300,000 has been destroyed. It can never be recovered.

            This is deflation. Money literally vanishes. It happens throughout the financial system and the economy. Banks go bust because they cannot pay their depositors. Pension funds dry up. Corporations can’t pay their debts because their stock is severely discounted.

            Deflation. It’s here (commodity prices, for example). If it snowballs, we are in deep trouble.

            • weka 3.1.1.1.2.1

              Not as deep trouble as if we have deflation and have sold the land to overseas buyers.

            • Rucker 3.1.1.1.2.2

              “Banks go bust because they cannot pay their depositors. ”

              Incorrect. While deposits in Australian banks in Australia are guaranteed up to $100,000 at each institution, the same banks operating in New Zealand are not required to guaranteed deposits. The scheme here, as set out by the Reserve Bank, is for every depositor to take a ‘haircut’ if a retail bank can not make its obligations. Depositors money will be essentially seized to keep the bank going.
              This is a worse outcome than in Cyprus where at least the depositors got some virtually worthless bank shares in return.
              Isn’t it interesting the difference on each side of the Tasman? Our Chief Banking Officer, Mr Key seems to think this arrangement is perfectly fine.
              His teflon coated words are little comfort. Aussie bank shareholders will not be ‘understanding’. The Big Four Aussie banks are massively exposed to the mining industry, which is tanking; bubble real estate markets in the two biggest cities; and ANZ in particular is exposed to both the dairying industry here circling the drain and the Auckland real estate market when a correction comes.
              Time will indeed tell.

              • Expat

                Rucker

                “While deposits in Australian banks in Australia are guaranteed up to $100,000 at each institution, the same banks operating in New Zealand are not required to guaranteed deposits.”

                Just another glaring disparity of the major socioeconomic differences between the two countries, fairness is still a priority in Aus, super, tax, etc, it’s not perfect, but a whole lot better than how NZ has gone over the last few years.

                Key claims to want to narrow the economic difference between the two countries, but doesn’t want to lay the foundation “stones” to build on, his view is to take the short cut, try to get short term gains, with long term consequences.

    • cowboy 3.2

      Well put together article Simon.

  4. Andre 4

    Wonder if they are stretching payment terms out to 90 days and looking for 20% cost reductions from their suppliers of “executive management”?

    • ianmac 4.1

      You mean andre that those well paid Directors will take a 20% cut in salaries? Not bluddy likely!

  5. feijoa 5

    So would producing “value added” products, such as fancy healthy yoghurts and such like, have helped avert this crisis?
    I heard Rod Oram bleat on about this for years, that just exporting commodities (just milk and milk powder), was a bad way to go.

    • Colonial Viper 5.1

      You would have needed to create a whole value added industry in advanced biologicals, but Fonterra execs never had the headspace or skills for it.

      So shipping another pallet of milk powder it was.

      • BM 5.1.1

        http://www.tatua.com/

        [lprent: And this is a Fonterra company? Hardly…. http://www.tatua.com/home/Tatua-Corporate

        You are clearly doing diversion comments. I’d suggest that is unwise. ]

      • weka 5.1.2

        what’s an advanced biological?

        • AmaKiwi 5.1.2.1

          I believe your ordinary PVA white glue is made from constituents of milk.

          You break down ordinary milk and manufacture it into something fancy with a good added value. You get patent protection so you have a monopoly for a period of time and you can charge whatever the market will bear. Sweat as.

          • weka 5.1.2.1.1

            Ok, but not just a new brand of yoghurt right? CV is talking about industrial processing?

            • Colonial Viper 5.1.2.1.1.1

              indeed – brand new patentable processes which help transform raw dairy products into complex added value compounds like enzymes, pharmaceuticals and high quality organic chemical stocks.

              It takes years and years of large scale R&D effort before any pay back.

    • maui 5.2

      In the boom times I can see under the “value added” model many more New Zealanders employed and kiwi businesses clipping the ticket and making profit. As for this model averting the crisis, I have no idea, I don’t think anything would be able to stop it. A debt jubilee?

  6. Atiawa 6

    50 workers of a South Taranaki located company manufacturing milk vats for dairy farms were jolted by the announcement today from their management, that Fonterra, who provide the vats to their farmer suppliers, no longer required the previously indicated yearly replacements/new milk vats. It is likely that 36 workers will lose their jobs as a result of this unexpected and sudden announcement.
    The province described as the headline act of the rock-star economy 18 months ago,is today struggling to get a gig at the Normanby town hall.
    Sure, some farmers who have borrowed too much will likely be severely burnt by the dramatic down-turn in dairy returns, but there will be many more workers deeply impacted by job losses and possible relocation.
    Where would 36 stainless steel workers find work? Tourism – what a fucken joke -.

  7. Ad 7

    Some things the National could have done about Fonterra:

    – Instigated a full review of the Fonterra governing legislation that enabled them to form such a dominant position upon both our dairy industry and our economy. Not for any other reason that it’s time.

    – Required one of its own Ministers to sit on the Board. May have taken a legislative tweak, but Fonterra is now as big a risk to New Zealand as real estate.

    – Even before that, actually have a Cabinet whole-of-government view on the risk of Fonterra to New Zealand.

    – Formed a long-term R&D relationship through the Crown Research Institutes and universities, with contestable funding. Just like Labour had got ready for rollout in 2008 through the Fast Forward Fund.

    – Directed its farming company to withdraw from supplying Fonterra altogether, and make it loud and clear it would not resupply them until they had changed to a value-added strategy and with a 100% stream-fenced environmental policy in months not years.

    – Get its many commercial entities to buy up the value-added shares when they came onto the market, and become a more active shareholder that way.

    – Withdraw MFAT and MBIE support until Fonterra could demonstrate they were acting in the best interests of New Zealand.

    – Have an economic development strategy for the country that pushed us away from traded bulk commodity reliance. And one that included Fonterra.

    – Give a nod and a wink to the Commerce Commission to put the dogs on their monopolistic ass.

    To me this is the stupidest corporate schadenfreude I have seen in quite some time.

    Still haven’t seen Federated Farmers say anything sensible on this pathetic disaster.

    What a chronic waste of New Zealand Fonterra is turning out to be.

  8. Macro 8

    Thanks Simon – an excellent summation of a very nasty problem.

    I’m happy that Landcorp are not going ahead with the Dairy conversions. I think they whitewashed the financial difficulties they are in – can’t have the “punters” panicking can we! – saying “they were concerned at the down stream effect of all those extra cows on the Waikato” Yeah Right! They would have been in, boots and all, if the Milk solid price was still $8.

  9. joe90 9

    An average of $20 through to $27-$32 of debt for every kg of milk solids produced.

    [audio src="http://podcast.radionz.co.nz/ckpt/ckpt-20160308-1809-national_dairy_debt_at_crisis_point-048.mp3" /]

    http://www.radionz.co.nz/national/programmes/checkpoint/audio/201792392/national-dairy-debt-at-'crisis-point

    • cowboy 9.1

      The drop to $3.90 is a cruel blow no matter how well telegraphed. The big issue is that no one can call with any certainty that this is going to reverse anytime soon. If we don’t start to see a substantial recovery in prices there is an massive systemic risk to the whole economy .

      The govt has been in complete denial about this issue recently claiming that dairy is only 5% of GDP. I guess they are going to learn abit about the multiplier effect of money not flowing through the economy and what happens when $38b in debt cannot be cashflowed over a sustained period.

      Ultimately there has to be a deflation of of land prices to rebalance the system to more accurately reflect its earning capacity. The banks will be doing all they can to have foreign buyer eligible to reflate the bubble which is the worst of all possible scenarios for our long term future.

      All this will be playing out at election time so its incumbent on the opposition parties to have some well thought out policies to reboot the system on a more sustainable footing.

      • One Anonymous Bloke 9.1.1

        One positive outcome is that it might help downsize the dairy herd.

      • Expat 9.1.2

        cowboy

        ” I guess they are going to learn abit about the multiplier effect of money not flowing through the economy and what happens”

        Judging by the last 7 years, I don’t think “they’ve” learnt anything at all, just business as usual.

  10. mickysavage 10

    Good post Simon. Any idea what going to 90 days for creditors is going to save?

    When I heard this I thought WTF??

    I had a quick squizz at Fonterra’s accounts for last year (https://view.publitas.com/fonterra/financial-results-2015/page/4-5)

    Distribution expenses were $700 million and other expenses were $493 million. Presumably only part of them are relevant. But if all creditors in these areas were affected the change would give a cash buffer in the vicinity of $200 million.

    • TC 10.1

      Solves nothing, just delays the inevitable and risks taking down creditors in the meantime.

      This is masking some apalling internal processes that make paying anything witin 30days of service nigh on impossible.

      Theyve also slashed staff right across the back office and expect the same output…..yeah right !

  11. Gristle 11

    The New Zealand dairy industry’s competitive advantage was low cost grass based production. This has changed with irrigation bringing in what was previously unsuitable land into dairy at a cost to the farmer and to the environment. The drive to milk volume saw cows needing a tonne of palm kernel per annum on top of bailage and some brassicas as well as the grass stuff.

    Fonterra’s role was to drive volume at the expense sustainable business growth. They encouraged volume growth which is based on high input cost model, an approach that is at odds to what made NZ dairy attractive to the world. The volume of milk products actually being exported around the world was relatively small compared to the volume of domestic production. And so Fonterra was able to dominate dairy exports on a world wide basis when not much volume was available to export: big fish in a little pond.

    Once the rest of the world geared up a little to produce for export then the demand was shown to be thin and guess what, the price dropped. (From memory this domestic market stability is what the Canadian dairy industry where complaining that the TPP would destroy.)

    I still have dry land sheep farm, and lamb prices are rubbish. My neighbour tries to do dairy support and his feed crops have failed for the second year due to drought. Even if he could grow something, nobody is wanting to buy dairy gazing. Me being downwind sees his topsoil gradually being transferred to my place.

    Dairy and dairy support farmers already are being pushed off farms by banks. My expectation is that banks are limbering up and wanting to be first off the blocks when it comes to realising cents on the dollar. You don’t get to make $5b a year without knowing when to cut and run. Some rural bank bankers have already been shown the door because they brought in too many risky debt.

    Dairy risky debt is currently 12% and forecast to grow to 40% next year.

    • weka 11.1

      Isn’t the fish in the pond thing a well known dynamic? What I don’t understand is why they couldn’t see this coming a mile off. Or did they and they simply don’t care (I guess I’m talking Fonterra corporate and that banks there. No idea what’s going on in various farmers’ heads).

      I hear sheep farmers saying they can’t make a living because of the low prices but what does that mean? Are they losing farms, or do they mean they can’t make a killing?

      • Gristle 11.1.1

        In my experience I have found that the degree of egotism required to hold corporate/government positions increases as you get more senior. Sure there are some very bright people their, but they all to often get blinded by their own brilliance/bullshit.

        Being not very good at toeing the corporate line, I was once sent on a course where we were instructed that:
        1. Your boss is more intelligent than you because the are he is your boss.
        2. Any idea that your boss comes up with is a good idea.
        3. Any good idea that you come up was really your bosses idea.
        Seriously, this was a day long bash up that the trainer, the CEO and a couple of GMs spent eyeballing me and four others. (And no I didn’t work for Trump.)

        So if you are a corporate who believes in their own divinity, then of course you are going to have a gap opening up between them and the reality.

        Many sheep farmers can get by until something major happens and big expenditure is required. They reduce fertiliser application, don’t upgrade fencing, don’t resow paddocks and try to do more themselves. In some ways they also isolate themselves and this is compounded by having less time to interact and being tired after all the extra work.

        But if you have to sell capital stock due to lack of feed then you know that you are going to be stuffed for a while. Stock will be sold at a low and you will have to buy (probably lower quality stock) at a substantially higher price once feed recovers. And these new ewes will have to managed separately for the next five years.

        My father-in-law tells stories of how his family farm operated during the Great Depression. Where the difference between walking off the farm and staying was measured in rabbits , possum skins and flax. That is a scenario that does not need repeating.

        • weka 11.1.1.1

          Thanks Gristle, it’s always good to get that level of detail from people who are affected.

          “1. Your boss is more intelligent than you because the are he is your boss.”

          Good grief. Is that the neoliberal mantra, if you’re more successful than someone else you must be better than them? Neoliberalism redefining intelligence.

  12. It looks like the opposite should be happening, that is the Dairy Farmers should be asking for cash on delivery for their milk.

    It can only be the farmers who end up carrying the can.

    Fonterra sure does appear like a business going broke to me.

    • TC 12.1

      Been hiding lots a bad news for years its a top heavy badly run organisation full of egomaniacs operating as a ponzi scheme.

  13. Gristle 13

    Okay, what happens if Fonterra gets into trouble. National says let Nestle takeover ( fill in whatever name takes your fancy.) This is assumption is on the basis of Solid Energy being dismembered.

    Remember that it was Labour who recapitalised BNZ and Air New Zealand and turned them profitable again after some dipstick thought it was a good idea to turn them loose against the big boys.

    Bridges and Key talking to those nice Australian, German and Dutch banks is just so much hot air.

    What is the rescue plan?

    • TC 13.1

      They are in trouble no ‘if’ about it. Dairy farmers have been trying to get out for years but tatua etc dont have the capacity to soak them up.

    • Don't worry. Be happy 13.2

      Grow world class medicinal weed. Grow hemp. Make value added products.

  14. Muttonbird 14

    Does anyone have sympathy for dairy farmers? Not sure I do.

    • weka 14.1

      I try not to lump farmers all together in a group (in this case all dairy farmers), but have to admit I find it hard to have sympathy for the them.

    • joe90 14.2

      For some, I do, and some can fuck right off.

      But it is also important to remember that while farmers were severely hit
      by depression, rather less than a quarter of all farmers actually sought formal mortgage relief under the 1936 Act; moreover, farming always provided at least subsistence, whereas urban dwelling did not. And within the rural sector, farmers were not always the worst off. As Alfred Coleman, Chairman of the Taranaki Commission, observed early in 1935:

      It is the prerogative of the farmer . . . to grumble, but he has by no means lost heart.
      He appears to motor into town, attend race-meetings, picture shows, etc., as freely as ever. No doubt he economises by patronising cheaper seats etc., but he nevertheless still avails himself of all social amenities. The people who appear to be losing heart and drifting into a state of despair are those in the towns throughout the Province who are either out of work or whose avocations barely afford the necessities of life. Their condition is pitiable.”

      http://webcache.googleusercontent.com/search?q=cache:-5daeurrD7MJ:www.nzjh.auckland.ac.nz/docs/1987/NZJH_21_2_03.pdf+&cd=2&hl=en&ct=clnk&gl=nz

  15. millsy 15

    I wonder how much this has to do with Fonterra’s backdoor stockmarket listing.

    • TC 15.1

      Royal commission will be the only chance to find out. Weldon and national will not want that.

  16. vto 16

    Five things…

    one, history never repeats, by Split Enz, yeah right https://www.youtube.com/watch?v=tzuJXqgsiSM

    two, there is no depression in new Zealand https://www.youtube.com/watch?v=2HVogejKx_c

    three, speculation. Speculating on the markets, A very volatile market. Always has been. These debt-addled farmers are worse than stock market speculators, who at least own up to their activity.

    four, no surprise. There is nothing that is a surprise about this, other than the surprise at some people’s surprise. And even that is not a surprise.

    five, hoovering… Be ready to hoover up cheap farms over the next while ….. the banks wont wait and already are not…. classic drug dealers, load up the client and get them hooked, then when can’t repay move in….

    • pat 16.1

      “three, speculation. Speculating on the markets, A very volatile market. Always has been. These debt-addled farmers are worse than stock market speculators, who at least own up to their activity.”

      There was an element of that but what is constantly overlooked in the whole sorry saga with its calls for diversification is the almost complete lack of alternative that the industry faced (and still faces)
      Why do you suppose that there was an almost wholesale shift to dairy/dairy support within large areas of the agricultural sector? Certainly here in Canterbury one of the main drivers was the fact the returns from sheep and beef ( even the cropping farmers Iknow will tell you that their goal is not ROI but capital gain) were not viable and in many instances the banks offered Hobsons choice to those wishing to remain on the land.
      One good year every 5 or 10 years is not the basis for any industry and with dairy now joining the other sectors in the doldrums what is the real future for our ag based economy?

      • vto 16.1.1

        Sheep boomed in the 1950’s to an even greater extent than dairy has today, yet look at it now.

        Kiwifruit boomed in the 1980’s – look at it now.

        I suspect dairy will sink back to one of these long term, run of the mill, averages in terms of return.

        But what interests me most is your comment about farming for capital gain. Bill Engish admitted the same yesterday… farmers have been trying to make money by capital gain, not revenue ….

        … which raises the tax bogey doesn’t it. If everybody was farming for capital gain then income tax is payable on those gains made by so many over the last decades.

        So come on farmers – pay your tax. Unless you are tax-dodging bludgers…

        (of course shortly a capital loss will be able to be claimed too…)

  17. Observer (Tokoroa) 17

    …. I am amazed that Fonterra did not collect data on worldwide milk solids production on a monthly basis.

    The fact that more people globally were milking cows, would have prepared our Dairy Industry for a parachute escape.

    I see Colonial Viper is blaming Labour for this bad management. Nothing new in that; it is his standard compulsive behaviour. But I do think he should be made to justify his nonsense.

  18. Sceptical 18

    It’s only a matter of time before one of Fonterra’s suppliers gets sick of the 90 day payment terms they seem to have unilaterally imposed. How long before it or one of it’s subsidiaries is served a Statutory Demand? From the Companies Act:

    “289 Statutory demand
    (1 )A statutory demand is a demand by a creditor in respect of a debt owing by a company made in accordance with this section.
    (2) A statutory demand must—
    (a) be in respect of a debt that is due and is not less than the prescribed amount; and
    (b) be in writing; and
    (c) be served on the company; and
    (d) require the company to pay the debt, or enter into a compromise under Part 14, or otherwise compound with the creditor, or give a charge over its property to secure payment of the debt, to the reasonable satisfaction of the creditor, within 15 working days of the date of service, or such longer period as the court may order.”

    If multiple suppliers were to serve such notice it would have the effect of reversing the change in payment terms. Force them to comply with their requirements under the law, or the company should be put into liquidation.

  19. Chrys Berryman 19

    Heard a dairy farmer on RNZ’s Country Life program a few months back…..he had not
    increased his herd in the boom times,so he used less fertiliser and other chemicals did not use imported palm kernel for feed ,had healthier more productive cows and was making as much profit as the more intensively farmed outfit down the road…..also his operation was not polluting the environment to the same extent. …..because of industrial farmings greed we now can’t swim in 60% of our rivers because the National Party think our rivers should only be fit for boating and wading……they backed this poo fest,and are now up to their armpits in cow pats and cheap milk.

    • TC 20.1

      So she can praise her national mates with ‘bold’ ‘decisive’ action after setting the scene with a very lightweight opinion piece on it being about the board.

      How about an in depth piece on the effect of sharemarket listing and unsustainable practices this govt has encouraged fran i.e. Actual finance journalism

    • Kevin 20.2

      “The company has blamed a “perfect storm” of circumstances for the pricing volatility it has experienced. Yesterday, Spierings singled out problems with lowered demand from the Chinese and Russian markets as a major factor in the global “imbalance” of the international dairy trade.

      He also noted the impact of European production increasing faster than expected.

      Said Spierings: “The time frame for a rebalancing has moved out and largely depends on production reducing – particularly in Europe – in response to these unsustainably low global dairy prices.”

      So it’s all the bloody european’s fault for not lowering production. Well, why should they just to accommodate Fonterra?

      • greywarshark 20.2.1

        Sensible farmers get weather forecasts and watch the skies as well, and try to prepare for storms even perfect ones.

        Whereas greedy galloping risk-taking, opportunistic grabbers get into a fevered sweat at the thought of the money they can make and the leverage they can get on that money enabling them to buy some more farms, and lose their senses. But they are so full of themselves and their own cleverness and every caution and critic gets sneered at.

        I think that we townies need to divide up the bits of country around us that are hit the worst and send out parcels of things to the Rural Womens and Support groups to help the children and mothers. They are the ones who will need it most. Their men might get drunk, or commit suicide, or try to win some back by gambling, or go into a depression, but the regular work to maintain the body and mind and prepare for a future when it settles goes on and the women will have to do it. Some will be very stretched, and not too up themselves about useless townies that they would reject a friendly gesture of help.

      • tc 20.2.2

        Yes it’s never the fault of highly over paid executives who fail to plan for the INEVITABLE downside in the the cycle of mass produced commodities with value added alternative and diversification.

  20. Simon Louisson 21

    Interesting comments on RNZ’S Morning Report today (which incidentally is providing excellent cover on this story).
    Firstly, they had fourth generation farmer Ben Smith saying how he has had to sell his cows and half his land due to the crisis and commented that he would be far from alone among inter-generational cockies who have had to quit due to financial pressures.
    http://www.radionz.co.nz/national/programmes/morningreport/audio/201792441/fourth-generation-farmer-bows-out-of-dairy

    Then, Finance Minister Bill English came on saying the crisis was an opportunity for NZ farmers to “rediscover their comparative advantage” (a bit tricky when you losing money on every litre you are selling). He said banks still had confidence in the industry (see later comments below), but land values were likely to drop and farming for capital gain was at an end. He ruled out bail outs or loan guarantees.

    http://www.radionz.co.nz/national/programmes/morningreport/audio/201792442/english-farmers-responsible-for-decisions

    Most tellingly, Paul Glass, Principal at Devon Funds Manageement noted the most concern was the overall level of debt in the industry, which he put at $40 billion among farmers plus Fonterra’s $7.5 billion.
    “So across the sector you have about $47 billion of debt and this year you have total sector earnings somewhere around negative $1-$2 billion. Those numbers are concerning.
    “Unless we see a strong recovery in dairy prices, it is heading towards a bit of car crash.”
    He said banks were in trouble because they had lent against land values rather than farm earnings and their ability to service debt. One bank had already taken a $420 million impairment charge against its farm loans.
    Glass cautioned that Fonterra, farmers and banks were “unusually optimistic and in some ways imprudent” in their pollyannaish forecasts of dairy price recoveries.

    http://www.radionz.co.nz/national/programmes/morningreport/audio/201792457/billions-of-dollars-of-dairy-debt-could-impact-nz-economy

    Simon Louisson

    • One Anonymous Bloke 21.1

      Glass cautioned that Fonterra, farmers and banks were “unusually optimistic and in some ways imprudent” in their pollyannaish forecasts of dairy price recoveries.

      Iceland. Whisper it in the corridors of power, a chill, lazy, wind, can’t be bothered going around so it goes right through them: Iceland. Put the bankers in the dock.

      Then sure, diversify the comparative advantage of your investment like Bill says. After all, he’s from Triple Dipton.

  21. greywarshark 22

    Bio on the Chief Finagle (soorry Financial) Orificer for Fonterra.
    Lukas Paravicini joined Fonterra as CFO in 2013 after 22 years with Nestlé. Most recently Lukas was General Manager for Nestlé Professional Europe.

    Before this role he held a number of senior finance positions including CFO of Nestlé Brazil, Nestlé’s fourth largest market, Vice President of Global Business Services and CFO of Nestlé Professional, and Nestlé’s globally managed Out-of-Home business.

    He has an in-depth understanding of dairy and has lived and worked in some of Fonterra’s most strategically important markets. Lukas holds a Business and Administration degree from the University of Zurich, Switzerland, and speaks five languages.

    From the post:
    Fonterra Chief Financial Officer Lukas Paravicini told The Standard the price cut “illustrates the challenges facing New Zealand’s dairy sector and the pressure continuing low global dairy prices are having on our farmers’ businesses”.

    Paravicini would not comment on whether the company was experiencing cash or liquidity pressures although he said Fonterra was on track to reduce its gearing (debt to equity) to 40-45 percent.

    He said the move to the harsh terms of trade was in line with its “global standard” and ‘it is about being efficient as possible and driving as much cash back to our farmer as possible.

    Haven’t we heard that we have to pay world salaries to get the best, and we can’t employ NZs because they are not experienced enough. Well this guy has been around, he’s worked for a really big food company, I bet he is well paid. He speaks five languages but hasn’t made himself understood in Nu Zilindease. But look at the mess we are in, entirely predictable. That was apparent to the meanest intellect, even in NZ, and we are good at mean.

    I think we could have made a better mess with NZ personnel, at half the salary. I object. More efficiency, means we need to pay lower salaries, and we can increase productivity of messes and malpractice per working hour. What is our world coming to, I ask you?
    edited

  22. Rich 23

    Fonterra’s suppliers should quietly get together and agree that if they aren’t going to pay up on time, they won’t get stuff delivered and work done. At least that way, they won’t be in a Dick Smith situation when they go bust.

    • TC 23.1

      Easier said than done as fonterra is so dominant within the industry.

      thats why they do this as its a ‘what are you gunna do about it’ scenario that will see some suppliers fall over.

      • weka 23.1.1

        Which is why the whole model was doomed from the start.

        • tc 23.1.1.1

          Yup another legislated near monopoly run by neoliberal con artists gaming the system…..much like our power industry.

  23. linda 24

    new Zealand economic weakness was masked be high prices from china thats been stripped away new Zealand looks more like enron or leaman brothers . if dairy bubble blew up with 37 billion of debt just wait to the housing bubble pops thats over 200 billion the ripples from the dairy collapse are only the beginning we haven’t seen full extent of the economic melt down yet . remember the open bank resolution policy

  24. gnomic 25

    Is this the future so bright we shall all need to wear shades, even at night? Or a future benighted?

  25. Tautuhi 26

    Commodity trading is a dead end street however NZ businessmen have a commodity trading mentality as most of them have never worked in the real world they are clones of the system, they don’t see the big picture.

    This is why NZ has gone from No 1 in the OECD in 1975 to No 26 in 2015, where is the Business Round Table these days, wallowing in their own fat?

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