Jenée Tibshraeny of interest.co.nz surveys the issues that have farmers worried right now, and looks at the facts behind the fears.
Rumblings from the dairy farming sector are becoming increasingly loud, as both the Government and Reserve Bank (RBNZ) make policy changes that affect the sector.
New Zealand has for years milked its white gold for all it’s worth – milk powder, butter and cheese comprising about a quarter of the country’s merchandise exports by value. But the effects of a period of intensification on both the environment and banks’ risk profiles have come to a head.
Regulators are making changes, and naturally, many of those affected aren’t happy.
However, with National and NZ First becoming more aggressive in their battle for the rural vote as Election 2020 approaches, and the powerful agricultural and banking lobbies joining forces against the RBNZ in relation to its proposed bank capital rules, the space is getting very noisy.
It’s increasingly difficult to differentiate between valid problems and pure resistance to change.
In an attempt to address some of the concerns being aired, interest.co.nz has summarised the major policy changes underway and provided context around them. We have simply detailed some of the facts and will leave you to draw your own conclusions.
‘Farmers will bear the brunt of the looming credit crunch.’
Retail banks will most likely be required to hold substantially more capital further to a RBNZ review. If the outcome, to be announced on December 5, prompts banks to restrict their lending, dairy farmers are likely to be among their higher risk borrowers affected.
Banks have in recent years been reducing their exposures to the dairy sector, having lent up a storm in the past. However it’s difficult to know the extent to which the pullback is being driven by looming capital rule changes.
The value of dairy loans as a portion of total bank lending (household, business and agriculture) has fallen to 8.8%, from about 10% in September 2016, according to Reserve Bank data. Unfortunately, the data set doesn’t go back further in time.
As of September dairy debt stood at $41.249 billion, comprising the bulk of total agriculture debt of $63.867 billion. However, dairy lending growth was near-stagnant as at March 2019, and has been drifting lower this year from $41.719 billion in January.
RBNZ Governor Adrian Orr last Wednesday said the areas where banks over are overexposed to dairy are narrow, yet deep. He said some farmers would “struggle at current levels”. Global dairy prices are perky and the low New Zealand dollar is making New Zealand exports attractive on the world stage.
In September Orr said that over the previous 12 months, as the RBNZ had been working with stakeholders on its capital proposals, it had reduced the Official Cash Rate by more than the banks’ estimated costs of the higher capital requirements. Yet some sectors of the economy such as agriculture had seen their borrowing costs rise. This, Orr suggested, could only happen if banks were “significantly raising” their margins.
‘Too much productive farmland is being converted to forestry.’
In October 2018 the government introduced a special test to provide a streamlined consent pathway for overseas investment in New Zealand’s forestry industry. The rule change aligns with NZ First’s One Billion Trees Programme. The government is stumping up $240 million to encourage more tree planting and the goal is for the current planting rate to double, so that a billion trees are planted by 2028.
Between 2002 and 2006, the amount of land converted to dairy increased in every region in New Zealand, except for Taranaki. In Canterbury it increased by 155% and Southland 158%, as per this Stats NZ graph.
Of the 27 consents (covering 73,200 hectares) the Overseas Investment Office issued to overseas forestry investors between October 2018 and September 2019, 12 consents (covering 14,300 ha) will include some farmland being converted to forestry. A hectare is about the size of a rugby field.
The government also announced in October 2019 that overseas-owned Pan Pac had received pre-approval to make forestry-related purchases of up to 20,000 ha, including conversion of land from farming to forestry.
‘Cows will need to be culled for NZ to meet its emissions targets.’
Targets of reducing biogenic methane emissions to 10% below 2017 levels by 2030, and between 24% and 47% below 2017 levels by 2050, have been legislated under the Zero Carbon Act.
According to modelling done in 2018 by the Biological Emissions Reference Group, which includes New Zealand agricultural and government representatives, widespread adoption of currently available mitigation options (primarily farm management practices) could see biological emissions fall by 10%.
However the group noted that “the ability of farmers to implement such practices varies widely, and while some farmers might achieve such reductions without significant negative impacts on profitability, for others the impact could be large.
“A greater than 10% reduction in absolute biological emissions will likely require a combination of on-farm mitigation and land-use change.”
The group also concluded: “Modelling indicated that when all mitigation options assessed by the New Zealand Agricultural Greenhouse Gas Research Centre are combined into packages, and assuming various rates of adoption of each practice by farmers, overall biological emissions in the future could potentially be reduced between 10% to 21% by 2030, and by 22% to 48% in 2050, relative to Ministry for Primary Industries baseline projections.”
‘Farmers are going to be paying through the roof for emissions.’
Farmers have been given until 2025 to come up with their own way of pricing agricultural emissions at the farm level. If they don’t show they’re making enough progress, they could be brought into the Emissions Trading Scheme (ETS) as soon as 2022. If this happens, they will receive a 95% discount.
Agriculture is responsible for 48% of New Zealand’s greenhouse gas emissions. Emissions from the sector increased by 14% between 1990 and 2017 – less than the industrial process and product use sector, which saw an increase of 39% over this time.
While the price of emissions under the ETS is expected to increase substantially over several years, at the current price of $25 per tonne of carbon emitted, the Interim Climate Change Commission estimated the average dairy farmer would pay 1 cent per kilo of milk solids.
Put in context, Fonterra’s 2019/2020 forecast Farmgate Milk Price is $6.55 to $7.55 per kg of milk solids. Presumably, whatever pricing scheme the agricultural sector comes up with will be cheaper than this.
‘Water reforms are going to cost tens of billions of dollars.’
The government is proposing to make a raft of legislative and regulatory changes by mid-2020 to clean up New Zealand’s waterways within “a generation”. It is considering restricting farmers from using new irrigation schemes or converting to dairy, unless they can prove this won’t increase pollution. It is also considering introducing tougher rules around fencing to protect waterways from farm runoff.
The Government wants to “tightly restrict any further intensification of land use through interim measures until all regions have operative freshwater management plans”.
It is also looking at ways of changing the Resource Management Act, updating the National Policy Statement for Freshwater Management and the National Environmental Standard for Sources of Human Drinking Water, and introducing a new National Environmental Standards for Freshwater and Wastewater.
The Ministry for the Environment has provided a number of statistics that paint a bad picture of the state of our waterways. It estimated the amount of nitrogen leached from agriculture increased by 29% between 1990 and 2012, primarily due to an increase in nitrogen fertiliser use.
It also said New Zealand has lost 90% of wetlands to agricultural and urban development; meanwhile between 2006 and 2015 there was twice as much deforestation as afforestation.
However industry group DairyNZ maintains the government’s proposals are “so severe that the net result is a significant economic loss… potentially without the environmental gains they are hoping for”.
Its modelling suggests that by 2050 total milk production will fall by 24% and all exports by 5.2%. It has put an $80 billion price tag on the proposed water reforms over 30 years. An independent advisory panel is currently going through submissions on the proposals and will report back to the government.