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23 April 2019

Banking the New Zealand Dairy Industry

Posted By: AIB Business

With a national dairy herd size of 4.8m cows across 11,700 dairy farmers, giving an average herd size of 410 cows and producing 1.85bn Kgs milks solids/ annum, New Zealand (NZ) is the world’s largest exporter of milk products and the 8th largest milk producer in the world. Considering cow numbers were c 2.3m in the early 1990’s, the NZ dairy industry has more than doubled in the past 20 years. In this article, Donal Whelton, AIB Agri Advisor explores what impact this level of expansion has had on farm profitability and on-farm debt levels.

On farm dairy debt levels

Debt levels on NZ dairy farms have increased significantly over the past 15 years, from €6.6bn to €24bn in 2017 (Average €5,000/dairy cow; €2.1m/dairy farm). For comparison the total level of NZ Agri debt of €33.6 bn compares to a total Irish Agri debt level of c. €3.4bn as per Central Bank data.

There are 2 significant differences between the NZ and the Irish Agri banking industry. Firstly, most loans to the dairy sector historically were ‘interest only’ facilities with no requirement to pay down capital. With land prices appreciating by c. 5% per annum over the rate of inflation between 1998 to 2008, dairy farmers were able to use this increasing equity in their business (i.e. increasing land prices) to expand and fund additional production. However with a slowdown in land value appreciation between 2008 to 2018 to 0.2% per annum over the rate of inflation, the NZ banks attitude to interest only facilities has changed considerably, with dairy farms now having to show the capacity to repay full capital and interest repayments.

Between 2015 – 2017 NZ banks provided an additional €3.5 bn to support the dairy sector (c.€300k/dairy farm), predominantly cash flow support during low milk price years. There is an ask that this money is repaid quickly (i.e. before the next low milk price period), as NZ banks advised that they will no longer support cash flow during low milk price years, requiring dairy farmers to have a more sustainable business going forward.

The other significant difference in banking is the ability of the NZ dairy farmer to use livestock as security when borrowing by way of a chattel mortgage. This facility, has for example, been used by contract milker’s to start their career path towards share milker’s, and later to land owning dairy farmers if they desire. The criteria however for funding livestock has become more restrictive in recent years, with banks now requiring the farmer to have a minimum 50% of the value of the livestock in their own funds; interest rates are higher than funding land or farm buildings at between 6-8%; maximum terms are 5 years or linked to the term of the share milking contract, with repayments on full capital and interest.

Overall while interest rates in NZ have halved over the past 20 years (cost of funds c. 2% currently), debt levels/kg milk solids produced have trebled in the same time frame. Some dairy farmers now find themselves with a high gearing ratio given stagnating land prices. NZ bank staff advised that 40% of NZ dairy farmers have Loan-to-Values (i.e. loan balance in relation to the value of assets) of higher than 60%, leading to anecdotal evidence that in excess of 1,000 dairy farms are currently advertised for sale.

Costs of production

In addition to rising debt levels on NZ dairy farms, costs of production have also risen in the past 20 years, eroding a lot of the competitiveness than NZ dairy farms would have enjoyed. Since 2002 FWE’s (farm working expenses) have increased by 49% alongside an 85% increase in interest / kg milk solids, resulting in a 52% increase in the breakeven milk price over the past 20 years.


With high debt levels, increasing costs of production coupled with other challenges – for example increased environmental costs, succession issues given the average age of a NZ dairy farmer is 60 and the potential introduction of capital taxes including stamp duty and capital gains tax - it is hard not to conclude that the scale of expansion in the dairy industry seen over the past 20 years is very unlikely to be repeated and indeed growth in production may slow down in the years ahead.


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