Expect more of the same as dairy prices on Global Dairy Trade (GDT) broke a two-month drought and posted an increase last week.
Westpac's head of agribusiness Mark Steed says this is already starting to happen right across the banking sector and is caused by global volatility and the cost of banks securing finance from offshore.
Steed says while the housing sector is different, the cost of borrowing for the commercial and agri sector is increasing and will continue to do so – irrespective of what happens to the official cash rate (OCR).
"This is not a future look, it's the current look," he says.
With successive low pay outs in the dairy sector, Steed says the bank is noticing that many of its clients are going through their budgets line by line and seeing what expenses are necessary and what are discretionary. He says farmers are making sure their decisions aren't going to impact on their medium-term business.
"I would make the point that at an $8.60 payout, the average cost was between $5 and $5.50/kgMS," he told Rural News.
"What we are seeing with our customer base is people reducing those costs to the mid $3s; so they have pegged their expenses back by up to 40%. We are also seeing farm owners and managers doing the work in the shed themselves, whereas in the past they may have outsourced this to a contract milker."
Steed says while some farmers are good, there is a lot of disorganisation and financial illiteracy in the dairy sector and says the lower down you go the worse this tends to get. He adds there are some excellent, outstanding sharemilkers and contract milkers, but there are some who are not on top of their finances and get caught out with things such as bills from IRD. He warns they are going to have to lift their game.
Steed says that 'informal' sales are taking place in the industry as farmers with high cost structures and eroding equity struggle to survive. But he doesn't predict a wholesale up of farms and says his organisation is committed to supporting farmers through the present challenging times.
"There is undoubtedly a number of some high-profile, highly-leveraged customers we know of that are going to be quite challenged," Steed told Rural News. "They are already being proactively worked on – in so far as developing strategies that are available to them to de-gear and sell non-core assets or land that are surplus to requirements."
What is not clear, Steed says, is the impact of the present downturn on land prices. He says there are a lot of farms for sale in Northland and Southland, but there have been insufficient sales to draw any major conclusions as yet.
Overall, Steed says the mood of farmers is better than many might have imagined. He says El Nino hasn't been as bad as predicted.
"Dairy farmers are trying to manage what is within their control. They recognise somethings are outside their control and have made cuts to their businesses," he explains.
"They realise it is unsustainable to have an operating cost that at the $5 level and that it needs to be down at the mid $3s. In the medium and long term, they need to be able to farm for that and also have a debt level that is consistent around those levels."