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Friday, December 10, 2010

Selling off New Zealand Farms

Recently I got a blast from the host of a New Zealand radio talk back program for suggesting that New Zealand farms should not be sold to overseas concerns.  We were cut off by the news and I tried to get back to him by e-mail.  Unfortunately, when you want to e-mail this radio station they provide you with one of those little boxes which is about three words wide and 4 lines deep.  I refuse to try to present a reasoned argument in such restricted space and I sent a short message asking for his e-mail address.  So far no reply.  The host is not widely known for listening to opinions that run counter to his own.  I am quite passionate on the subject but would very much like to hear counter arguments.  Put them in comments and I will publish them anonymously or under your name as you like.  I'll try to present fairly the argument of the host.

He said quite rightly that if sales to overseas concerns were stopped, the price of farms would drop.  No argument there.  Supply and demand is a harsh mistress and with reduced demand, farm prices would surly drop.  This would be added to the present drop in farm prices due to this little  economic glitch* that we are going through.

*if you think this one is bad, just wait for the next one.

I replied that it is a zero sum game.  What a buying Kiwi gains a selling Kiwi looses and vice versa, depending whether prices are going up or down.  Besides, the price of your farm is of no interest unless you want to sell it.  Of far more importance is the revenue you are earning from the farm.

He quite correctly pointed out that the loans you can get from the bank depend on the equity (perceived value) of the farm.  Banks for the past few decades have been loaning vast amounts of money to the farmers based on the valuation of their farms.  In other words, the next owner was expected to pay the running costs of the present owner.  Basing loans on equity rather than earnings is part of the reason that we are in our present pickle but that is another story.  From an item on National Radio, it would appear that the banks have recognized the folly of linking the amount of a loan to the valuation of a property* and are now lending on the far more fiscally responsible basis of the projected revenue from the farm.

* there is no choice when making a loan for a mortgage on the family dwelling.  It has to be based on the  value of the house.  A rental property is another matter.   A loan to buy a rental property, a business or a farm can and should be based on its expected revenue.

My main point though, which the host very much disagreed with, is that when you buy a farm, you generally have to borrow some portion of the buying price from the bank.  It is a rare individual who can simply reach into his pocket and find the full purchase price.  The higher the price, the more you have to borrow.  The more you borrow,  the greater your capital and interest repayments. These  repayments  come out of your revenue.  You end up  working for the bank. The money you earned is going into dividends for the shareholders of the bank and into the bonuses of the bank managers.   They, a service or enabling industry, end up taking a large portion of your earnings which should be going into your pocket.  You earned it.  This revenue would be much more usefully applied to reducing your loan, improving your financial security, improving your farm and simply having money for a vacation from time to time.  Instead you end up working to make profit for the banks (most of which are Australian, by the way).  

I live in the middle of a wine producing area.  Talking to some of the owners, they maintain that the only time they make a profit is when they sell the farm.  They depend on ever increasing farm prices to leave the industry when they retire with something in their pocket to show for their labor.  I very much sympathize with them in wanting to have farm prices continually increasing.  However, why do you think that they have not made a profit during the operation of the farm.  A good part of the explanation is the fact that much of their profit has had to go to pay off the loan they took out to start the farm.  I'd much rather see a system in which farms sold for  their original buying price plus, of course, inflation and improvements.  Much better that the farmers earn a profit during the operation of the farms.  Much better that they can pass on a debt free farm to their children.

Incidentally, one implication of the host's position that we must have overseas purchase of our farms to keep prices up is that the only way we can make New Zealand profitable is to continually sell off the means of production.  We will eventually end up being tenants in our own country.  This is no way to run a country.  The other implication is that all our farmers remain slaves to the banks.

As the rest of the world depletes her ground water, expands her cities over fertile farmland, exhausts the fertility of her soils and sends their soils down their rivers, and just generally trashes her food production capacity, it is the beginning of an agricultural boom for countries that can produce food.  This is New Zealand's main industry and we produce very high quality food.  What earthly sense does it make to sell off our means of production to countries who are going to be buying our food.    Why do we want to trade a small economic gain now for a sustained economic gain far into the future.  We are talking about farms here but the same applies to SOE's, Air Ports, Sea ports and so forth.  Is there some vested interest amongst the people making these decisions.  Is there some hidden Winebox underlying these decisions. Do they have shares in the banks. Perhaps if we could understand the motivation of the decision makers it would become clear why they are so hell bent to sell off our family jewels.

1 comment:

robertguyton said...

I entrely agree with you William and if I may, will clip a little from your post and link my interested readers to your blog.
This point that you are challenging - selling to wealthier overseas buyers, is causing huge problems here. Changing the view of farmers on this issue will be a mission - good luck!