This isnt the only quake to hit NZ.
NZ dairyfarmers have gone mad & paid rediculous money for cows & land now both have crashed & some dairyfarmers will burn! Two years ago land prices in NZ got up to NZ$70 per kg of Milk Solids (the way land is often valued in NZ) today they are max NZ$40 & some farms are selling nearer to NZ$20. Two years ago dairy cows peaked at NZ$2000 today they are less than NZ$1400. Why? They went mad thats why! With total disregard for cashflow/profit or decisions based on commonsense some have made crazy investment decisions! Land was never worth NZ$70 & cows were never really worth NZ$2000. The mad crazy market drove the prices beyond what they really were worth. In areas like Canterbury there are hundreds of farms with massive new rotaries & brand new irrigation systems (centre pivots)...the capital spending is extraordinary. The capital works look impressive but the debt now looks very scarey!
The milk price didnt drive farm prices higher, the profitability of NZ farms didnt justify the extreme prices or massive capital spending......so why!!
The expectation was that land prices would forever continue to rise.....so farmers started to speculate & to farm the gain in speculative gains(increases in equity & borrowing against non real equity gains). Who supported this madness....the bankers!!!
The bankers carry much of the responsibility for the very risky lending on non existant profits & on unreal capital gains. Many farm purchases were not based on sound economics or profitability. Does this sound like Ireland? The banking crisis has hit dairyfarmers or is about to....big time!?
On our recent NZ study tour we met one young dairy farmer who bought a farm 2 yrs ago with 50% equity (based partly on cows worth NZ$2000) today that same farmer has equity of 23% & is hanging on by his finger nails. This is frightening stuff!
Now the Australian owners of the NZ banks are saying enough is enough. They are calling in much of the excessive farm debt. Farmers are getting calls demanding in some cases up to $500,000.
Now where do you get that sort of money if all banks are taking the same line???
The "Crafar case" is a very public example of the inevitable increase in farm bankruptcies.
Everyone is expecting the number of "crash & burn" dairyfarms & farm businesses to increase in NZ.
Nicola Shadbolt & partner Shane Carroll refocussed our visiting French group (from Brittany) back to the basics. Nicola emphasised the importance of profit & cash. Benchmarking in Discussion Groups must focus on the right profit ratios & on cashflow. Profit per hectare is insufficent & very risky.
A strong cashflow business can capture purchase opportunities (farms or farm business expansion)but in doing so must not lose sight of profit, return(& profit) on equity & cashflow must be strong going forward. If there are NZ farm businesses that are going to "crash & burn"....believe me there are others who have kept focussed on cashflow who will now await their opportunities. Dont get swept along with the madness of a gold rush! Cash is King!Keep focussed on cashflow & profit.