At the end of 2014 we published a blog asking Why our are farmers farming for capital gain?

In it Andrew Gawith, then 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. Now the focus goes plainly on dairy debt as the price the farmer receives is plummeting and the banks have been recklessly lending, knowing they are only lending on the promise of capital gain. And our country has no capital gains tax and no land tax, so it is a great place to pour investment money from China and other countries. The TPP, if ratified, will not allow our country to ban the sale of land to foreigners.

Gawith pointed out that in the twenty years between 1990 and 2010 the real after-tax return to farmers was something in the order of 7 percent to 8 percent a year,’ and that this was double the return of sharemarkets.

He said farming was 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.’

So with farmers drowning in debt, they can’t withstand the drop in dairy prices from a high of over $8 per kilo milk solid to below $4 by March 2016.

Dairy debt was around $32 billion in 2013, up from $8 billion in 2003, which makes a quadrupling in a decade! And by March 2016 it is $37.8 million. Gawith said in 2010 that dairy debt represents two thirds of all outstanding farm debt. According to Federated Farmers in February 2016, one in ten dairy farmers were feeling pressure from their banks. During the time of growing stress the Minister of Agriculture kept urging banks to cooperate with dairy farmers. The price of dairy land averages $39,367 per hectare, and in Taranaki the average value is even higher. Dairy farmland in New Zealand is reported to be the dearest in the world.

Farming is very capital intensive, with only mining and utilities more so. According to an 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%.”

Janette Walker, a rural debt mediator, told John Campbell on Monday 8 March that 85% of dairy farmers are not going to make a cent for the next two years and if land prices drop it will be a train wreck. Overseas land buyers are circling. Banks have lent too much for too long, based on capital gain. They completely missed the cashflow issue. Supply companies, vets, contractors and lawyers are watching closely as they are unsecured creditors.

Paul Glass of Devon Funds Management told a September conference that for every $3.90/kilo dairy farmers get in payout they have $19 debt/kilo on average. For years Glass had been concerned about the high level of debt carried by not only dairy farmers but also by Fonterra, our major dairy company.

Actions required

If dairy farming turns out to be the cause of our country’s Minsky moment, how can we avert a crisis? One Northland dairy farmer who was selling up told Checkpoint that government should let innovations emerge at local level, they were too dependent on outside advisors coming in.

Now the government could do what they did for central Christchurch land after the February 2011 earthquake to avoid a slump in land price – buy up land from distressed dairy farmers. But they shouldn’t borrow from a bank for the money. They could issue Treasury Notes; that has been done in other countries before in crises.

There is something else a government could do and that is QE for the People. Give out new money (Treasury Notes) in the form of a Citizens Dividend. This is on condition that any debt must be paid off first.

Or the banks could become shareholders in the businesses they lend to until it is clear which way the business will go.

Given the importance of private debt before a crisis, whatever action taken should not add to overall private debt.You need to reduce the debt level without reducing aggregate demand at the same time. 

But none of this is likely to happen. Pigs might fly. If government will not act and get together with banks and farmers, and the most valuable farm land is in danger of being bought up by overseas buyers, then it is up to local government to do something big.

The first option is that they distribute a Citizens Dividend. To prepare for this all local authorities, and all agencies of local authorities like Community Boards should by now be compiling a list of their citizens, just as Alaska and British Columbia do. Alaska does it to share in the bounties of oil revenue, BC does it to share out the proceeds of their carbon tax. In the case of Alaska, they give the dividend to all citizens who have lived there for a year. They need to buy up the land of distressed dairy farmers with a new currency issued on a par with the national currency. The difference is that it needs to be designed differently as well. If we can’t get to this stage in one leap, then let’s stop there. The next locally created currency will have to take this next leap. Or a Maori incorporation that includes dairy farms could issue a new currency after persuading local businesses to accept it.

They need to buy up the land of distressed dairy farmers with a new currency issued on a par with the national currency. The difference is that the currency needs to be designed differently as well to include a circulation incentive. If we can’t get all the way to this stage in one leap, then let’s stop there. The next locally created currency will have to take this next important step. Or a Maori incorporation that includes dairy farms could issue a new currency after persuading local businesses to accept it.

Whatever happens we must find a way to keep our precious dairy land in our country’s ownership. It either has to be owned by government, local government or by a Maori entity, be it an iwi or an incorporation. Whichever body does it, their new income will be derived from land rent. At that stage a lifetime lease contract must be arranged to ensure security of guardianship.

The public must thenkeep a close watch the on public bodies because they will find themselves under political pressure to reduce land rents and effectively hand out free lunches. (this happened in Canberra and government leasehold land rents have been progressively reduced in New Zealand). To ensure this doesn’t happen, it is important to give the new currency special benefits to ensure it circulates without deadweight taxes – trades in it should have no income tax or GST. The currency should be designed as a means of exchange only and for this, it is important to build in an incentive for it to circulate quickly.

But this is a whole new matter. It will require some staunchness on the part of local government when accosted by national government. However, considering it now attracts a full land rent, which is fairly high, it is only fair that the new currency must have tax advantages over the national currency to compensate.