Why our are farmers farming for capital gain?

Andrew Gawith, Director of Gareth Morgan Investments, described the economics of farming in New Zealand as “speculative” as the financial benefits are almost entirely dependent on capital gains. Other than dairy, income is puny and unreliable, he said."Farm finances don't add up." (NZ Herald, Nov 30, 2010)

Alvin and Judy ReidWhereas UK and US price of rural land doubled in a decade, the value of farmland in New Zealand has risen at 10.7% a year over the past 20 years. (That is the value of farmland doubles in less than seven years). “That’s a real after tax return of something in the order of 7 percent to 8 percent a year.” He points out this is double the return of sharemarkets.

He says, “Farming is the most popular business for banks to lend to. While other areas of economic endeavour are starved of capital, banks have very nearly drowned farming with debt. The ease with which farmers can get capital has helped push up the price of land.”

If farmers are drowning in debt, they will not be able to withstand a rise in interest rates. An article in NZ Farmer warns that with the drop in the price of milk, a quarter of farmers are heading for loss unless prices rise. So as China’s economy slows the high debt farmers are most vulnerable. Winston is watching.

gw-speech-the-significance-of-dairy-to-the-new-zealand-economy-7-may-201400This is our dairy debt from 1990-2014. It has multiplied by eight over those 24 years. Gareth Vaughan reminds us that nearly 70% of this dairy debt is on floating mortgages. Dairy debt was around $32 b in 2013, up from $8 b in 2003, which makes a quadrupling in a decade!

Farming is very capital intensive, with only mining and utilities more so. According to a NZIER study “Around three quarters of value added in agriculture is from capital (land, plant and machinery). This is higher than the economy wide average of around 50%.”

If dairy farming turns out to be the cause of our country’s Minsky moment, can we avert a crisis by taking control of our currency creation and land tenure system at Community Board level? Not only is this our only hope, but it will lead eventually to greater productivity and equality – as well as getting good young farmers on the land at an affordable entry level.