New Zealand-Dairy Crisis gets more severe.
A growing number of dairy farm bank accounts are in distress as farmers face up to what an accountant is calling their "darkest month" and the full shock of Fonterra closing its cheque book.
Terminal tax on last season’s bumper earnings is due next month but with Fonterra withholding its usual April part-payment of the value-added component of payout to protect its balance sheet, cashflow is becoming a major problem.
Morrinsville agribusiness accountant Nigel McWilliam says farmers are having to ask Inland Revenue if they can pay off the tax over three to six months.
"April will be the darkest month heading into May and June when there is no respite at all with incremental payments from Fonterra. And of course in July those who have increased production - Especially those with conversions - will have to buy extra Fonterra shares.
"It’s going to be very tough and tight until October until Fonterra pays that 70c/kg - providing they do pay it."
To shield its balance sheet from the global downturn, Fonterra says farmers must wait until October for the off-farm earnings component of payout. Usually this is paid in two tranches in April and October. With a 70c/kg value return forecast for this season, this means farmers are doing without 45c/kg at a critical cashflow time in their budgets.
Ministry of Agriculture North Island regional manager and Rural Support Trust liaison Phil Journeaux: "Banks are starting to move on a number of farms - particularly some of the conversions that have borrowed a lot. And we’re certainly picking up a bit of noise around the (rural) servicing industry."
Bankers contacted by Farmers Weekly reported increasing numbers of distressed dairy farm accounts, but said they were working with customers to find a recovery path and mortgagee sales and foreclosures would be a last resort.
BNZ head of agribusiness Tony Arthur says the sudden drop in payout has pushed some farms into the red.
"But I want to stress that our priority remains rehabilitation. The bank should be one of several trusted advisors that farmers should be speaking to when facing cash flow issues. We want to be part of those conversations and getting into those conversations early."
ANZ National rural banking chief Charlie Graham says he can’t remember the last time the bank did a mortgagee sale.
"But inevitably in situations like this you get a transfer of clients into our debt management area. But the numbers aren’t huge."
The bank’s aim was to find solutions. "Maybe the business has to rationalise in some shape or form but at the end of it we are looking for a strong business to come out."
Specialist agribusiness bank Rabobank says work on "distressed accounts" has increased.
"There’s a lot of reworking of budgets....looking critically at costs in the business. In a lot of cases this is not completely cutting out a deficit situation but it is reducing it as low as possible," says New Zealand manager Hamish Midgley.
Claims that banks are partly responsible for farmers biting off more debt in recent good years than they can now chew, may be justified.
Rabobank is being approached by farmers who "clearly have way too much debt given to them by one bank or another", Midgley says.
"We like to see debt levels at $20/kg milksolids or below, though we have some farmers who can operate in the high $20s. But we are seeing deals presented to us in the $40s (level). That’ll cashflow itself on a $7.90 payout but ...you just can’t make anything work at $40 per kg debt and a payout of $5.50-5.70." (The latter is the "status quo" payout Rabobank and others calculate around).
Fonterra’s payout forecast is $5.10, after starting the season at $7.
ASB rural banking general manager Craig McBeth says the bank is still lending but focusing on supporting its existing customers through a tough transition. He urged farmers under stress to communicate with their banks and other professional advisors, but first to communicate at home. "The stress needs to be sorted there first."
Rabobank is expecting a "reasonable turnaround" in payout by the end of next season, says Midgley.
The BNZ’s Arthur also had a positive outlook: "This country produces enough food for 55 million people - the opportunity for NZ farming remains extremely strong."
Meanwhile, Rural Support Trusts are urging farmers in financial distress to use them as a conduit to expert advice, and Federated Farmers vice-president Frank Brenmuhl wants farmers to check on their neighbours’ welfare.
