South Canterbury Finance goes West

Yesterday was a sad day in many ways for the South Canterbury Region.  At least most of the fallout has been constrained thanks to the Government's retail deposit guarantee scheme.

There are many others better qualified to debate the why's and how's; the purpose of this note is to consider the effect on the dairy market in the South Island.

Here is what we know about South Canterbury and related companies;

1. They are a major shareholder of Dairy Holdings which operate 58 dairy units on 14,201 effective hectares, milking 43,439 cows.
2. They are lenders to a number of South Island dairy farms, often with second tier securities.
3. The receiver will be instructed to liquidate these holdings over time.

What will be the impact then on the dairy market?  Again, the facts appear to be;

1. Dairy is very profitable at present with a payout above $6/kgMS
2. A lot of farms, including some of the properties involving SCF, have too much debt as a result of reduced asset values
3. Credit continues to be constrained to deals that have good fundamentals.  It is noted that MyFarm has had no problem getting bank finance for well funded investments (<35% debt)
4. The rural real estate market has been relatively subdued with few transactions.  In our view, this has been equally caused by a lack of buyers and a lack of property on the market.
5. The market is not in a position to transact a large number of farm sales.

The impact for existing farm investments that have a reasonable investment timeline is assessed as nil.  Dairying is profitable and the effect of a land sales programme, however it might be constructed, should have no impact two years out.

The impact on current farm values is more interesting - the effect will probably be at least a holding of values when there was signs of a small upward trend.

In fact the market is looking for more good quality farms to come available so the effect of some additional properties coming to the market could be positive.

From hearing the Honourable Minister Carter on the radio, the government is well aware of the potential knock-on effect to the rural economy so let's hope that the planned sale of the business or liquidation of the assets is handled with some care.

Developments over the next few weeks will be interesting but in the meantime we can expect some good news with a firming globalDairyTrade result tommorrow.