The history of New Zealand is speculation on farm land which stokes up debt, with disastrous consequences when the bubble bursts. The New Zealand industry is going through another one. 

During the Great War, farm land prices boomed. When farm product prices collapsed in 1920, farmers walked off their land. It was not that the land prices were too high. Farmers had borrowed to purchase their farms and with lower revenue they could no longer service the debt. (Much the same seems to have happened during the Long Depression of the 1880s, but there is not the statistics to trace it with any precision.)

Not all farmers walked off, of course. Those with low or zero debt and a modicum of luck – like reasonable weather – can usually survive such price collapses.

A similar thing happened in the 1930s. Again many farmers were carrying too much debt. I calculate they were not getting a reasonable return on their labour, even under the better prices of the 1920s, When product prices plummeted at the start of the Great Depression many could not now even service their debt let alone make a living, and they walked off their land.

Almost the same thing happened with the removal of land price controls by the first National Government after the war. Fortuitously, wool prices boomed in the early 1950s enabling farmers to ease back their debt burden. The same thing happened to some farmers with the wool price collapse in 1966.

My calculations in the late 1970s suggested that again farmers were carrying too much debt. Muldoon was bailing them out with SMPs and the like. When the Rogernomics government removed these in the 1980s, some farmers found they were unable to service their debt and walked off their land.

It seems to be happening again. When the Chinese markets opened up there was a surge in demand for dairy products which resulted in higher prices. To capitalise on them, dairy farmers increased supply in part by purchasing more land, borrowing to do so. Inevitably international dairy supply caught up (perhaps now the world is in over-supply) and prices collapsed. Some farmers find they have paid too much for their land, gambling on a long run price of $8 a kg of milk solids, while the current price is below $4kgs. They are now struggling to service their debt.

I am sure about what happens next. Some farmers will walk off their land as banks foreclose on them. Some farmer will demand government bailouts. Everyone will blame Fonterra; it may make mistakes but it did not purchase the overpriced land. The banks themselves are not under threat. Perhaps they were imprudent advancing debt on the basis of excess optimism about long run dairy prices but they have diversity in their lending and dairy loans are only a small proportion of the total.

There may well be a drop-off in dairy production. Feeding palm kernels is likely to be cut back, but a bigger worry would be if some farms went to ruin with deterioration in pastures and herds and inadequate maintenance of farm equipment, as occurred in the 1930s. Banks are, probably, not foreclosing on some farmers in order to avoid this.

In national economic terms, any falloff of production is compounded by the falloff in prices so that real incomes (purchasing power) fall more than production (as the National Accounts recently reported). There may be further production falloffs as the lower incomes result in less spending but there is not much evidence of this yet.

The revenue from higher prices for farmlands goes to the sellers – often retiring farmers. Some of them will have lost part of their savings in poor financial decisions (as in various finance company failures, but part of those losses were borne by taxpayers), some will have invested in housing (contributing to the bubble – they may lose part of their savings in a burst) and some will have been spent on consumption.

So the booming farmland prices have generated prosperity throughout the economy. Conversely, the collapse will generate the reverse. But those who benefited on the upswing will not be exactly the same as those who suffer from the downswing.

Why do we keep doing it? Don’t they ever learn? Perhaps they think this time it is different – it always is; it never is – or perhaps they do not know any history. Some may be gambling they will get out with a profit before the crash; some do, but in doing so they leave someone else holding the debt.

Too much of our farming is for capital gains. Too many farmers are willing to take low incomes relative to their assets and their effort, in return for a large capital sum when they sell out. Big capital gains usually require ‘high gearing’ – high debt to income – as high as your lenders will let you get away with.

At which point the debt financing activity becomes speculation and a crash is eventually unavoidable – as happened in 1928 on the American stock market and in 2008 in the American housing market and which may yet be repeated in the Auckland housing market.

What to do? The die is cast for this round of speculation and some are going to have to pay for it – including innocents who were not beneficiaries of the upswing. The precise responses depend on how the economy unfolds after the crash.

Later we might consider measures to dampen the booms. The easy solution would be a comprehensive capital gains tax – I’d go for a real and realised one, but that is a rather technical issue. But capital gains are so built into our farm sector, it is not obvious just how we can introduce one. It ought to be obvious though, that having a leading economic sector integrally dependent on a boom and bust speculative cycle is not in our best interests.

Comments (14)

by James Green on March 22, 2016
James Green

I think this makes a great case for introducing Window Guidance. That is having government setting quotas for the banking sector on how much they are allowed to lend to each sector of the economy while the individual banks decide who is the best to lend to among each sector.

This is how the Asian tiger economies grew as Richard Werner described in his book Princes of the Yen (which is now a documentary @ )

In the long run though I think full-reserve banking is the way to go to get around these "business cycles". Cyclical boom-bust lending is inevitable in our current system and farmers shouldn't carry the full blame for their over borrowing; we can design these cycles out of our economy, but doing nothing about the underlying problems will of course change nothing, so stuff like this keeps happening.

by Geoff Fischer on March 22, 2016
Geoff Fischer

Limit  farm ownership to one economic unit per person and it would be hard for the likes of Crafer, working hand-in-glove with the banks, to cause such economic carnage.

by Rich on March 23, 2016

 It was not that the land prices were too high. Farmers had borrowed to purchase their farms and with lower revenue they could no longer service the debt

Surely you'd expect that a farm (like any business) would be able to make enough gross profit to cover the cost of capital (land and stock) - if this isn't the case, then land prices are too high.

One factor behind this equation in recent times (I have no idea of earlier history) is that it has made economic sense to run farms at break-even or a small loss, with the (tax free) capital gain on the fast appreciating land making up for the foregone profits (and minimising tax - agriculture paid $319mln in company tax in 2009).

Having zero or negative profits as the norm means that land prices adjust accordingly, so even if a farmer wanted to make a clear operating profit during the boom, they would be unable to.

by Rich on March 23, 2016

@James - "full-reserve banking" - as in nobody is ever allowed to borrow money for anything, even from their friends and relatives?

by James Green on March 23, 2016
James Green

Full-reserve banking as in every New Zealander is allowed to have an account at the Reserve Bank and institutions are barred from offering interest for holding cash except on term deposits and notice savers.

You're allowed to borrow money from anyone, but they must give you their own money and not make up the money.

by Rich on March 23, 2016

Mary has no money, Mary's mother, Jill has a car worth $10,000

Jill lends Mary the $10,000 to buy her car

Mary now has a car, Jill has an IOU for $10,000

They just created $10k. Would you ban this behaviour, and how?

(Sorry to threadjack...)

by Murray Grimwood on March 23, 2016
Murray Grimwood

Mr Green is correct. If you 'create' any extra 'wealth' (actually, it's merely a hopeful proxy for real wealth which is actual posession of the desired item) on a finite planet, sooner or later you run into a problem.

Actually, several. All linked. Inextricably.

Which means the original post makes the mistake of assuming bumpy continuity, rather than termination.

The link points out why we are seeing falling commodity 'prices' even for the underwriter of all underwriters: oil. And farm produce. Permanently.

Who actually believed that a system which ramped debt exponentially, could (a) be a true tracker-of/marker-for anything and could (b) continue to be underwritten in any meaningful sense?


by James Green on March 23, 2016
James Green

@Rich - Your example is perfectly fine in full-reserve banking because Jill is now $10,000 poorer and can't use the IOU to pay for anything. If a bank lends $10k it still retains its original $10k and can continue to use it (although in practice it will have to keep aside about 10% of what it lends to cover routine withdrawals from depositors).

by Murray Grimwood on March 24, 2016
Murray Grimwood

James - then what happens from now on, in a power-down economy?

Only energy underwrites money, and nett energy supplies pave peaked.

So you have to create a dwindling-reserve banking system.

too late - central banks are already there..........

by Moz on March 24, 2016

I'm interested to hear your opinion on the Kerikeri kiwifruit boom, when land prices there increased dramatically as the land went from livestock to horticulture. Motueka is a less dramtic case as it's been horticultural for a long time, and of course they farm retirees as well. In both cases land values cycle significantly and it's just regarded as part of the normal farming environment.

I think one difference is that most people know (or at least it's common knowledge) that with any new crop there will be an initial price spike then it will slowly drop to the long-run rate, so if you're lucky enough to ride the wave you can repay the investment almost immediately and sit on profit after that, but if you chase the peak you will always get burned.

The tricky with the tax/government is to balance the needs of farmers for capital, the optimum farm scale, and the desire of non-farming investors for quick returns.Quite how the government distinguishes between a "genuine" farming expansion funded by reasonable debt, farmers speculating on a commodity boom, and investors looking for speculative capital gains I don't know. Or, for that matter, foreign capital flight looking for anything at all more stable than the situation they're fleeing.

Farms are also the traditional home of pump'n'dump scams, as it's possible to run down hidden capital to increase returns (measuring soil health is hard-to-impossible, for example).

by James Green on March 24, 2016
James Green

Murray - Energy powers the production of useful goods and services which underwrites money. But NZ has quite a bit of its own energy in the form of hydro power and electric cars should help out on that front in the future too.

Come to think of it global hydrocarbon production is well beyond demand at the moment (hence $30 a barrel) and the only limiting factor seems to be how much climate change the world can tolerate, not the amount of reserves. Solar and wind are really taking off too so I'm seeing why "nett energy supplies pave peaked." Perhaps you can enlighten me?

by Murray Grimwood on March 24, 2016
Murray Grimwood

Electric cars are not the answer, because the first-world desire to carry on (just with the odd substitute) is so far from addressing the problem that it's irrelevant. Chris Martenson calls it 'the I-Phone moment'; when the crowd hold them up as some kind of sign that technology can do it alone. Actually, technology is part of the problem.

Did you actually read that link?

Please take off your econ101 hat. We have been doing it all on ever-increasing debt. That is an ever-increasing demand on future energy-supplies. So CAPEX is in trouble. As are commodity 'prices'. Econ-speak is no good from here on in - in fact it was made irrelvant with peak conventional oil in 2005/6, and the repercussive GFC 3 years later. Notice things arent getting 'back to normal growth'? They never will, never can.

Those who continue to 'value' stuff with money (fractionally issued, exponential-growth-requiring, debt-laden) are wasting their time. There won't be enough nett energy in future years (hydro only does electricity, and not at the EROEI that oil gave) to pay back the debt required for development of the remaining (we've cherry-picked the best; it's gone already) oil. If the 'price' of a barrel goes up to where it now has to be (given the lowering EROEI) the world economy falters. If it stays where the world economy can cope, no exploration/development project stacks up.

This was all predicted a long time ago - I've been on about it for a decade. Time we had the debate -

Point me to the politician or the reporter brave enough to research and confront that one. They're all MIA.

I'm spending this year writing the guidebook to negotiating the bottleneck - at all levels. I may be too late, of course......


by DeepRed on March 27, 2016

If there's only one good thing to come out of a slow-deflating dairy bubble - quite possibly followed by a loudly popping housing bubble - it'll be an opportunity to properly retool NZ's economy. The recent Future of Work conference might have a few pointers.

by Brian Easton on March 28, 2016
Brian Easton

The current problem is not simply the banking system. Previous farmland bubbles were financed by mortgages from non-banking sources. What has happened today, is that instead of individuals providing mortgages to farms (and houses) they deposit their savings in a bank which lends it out (taking a margin for doing the job).

Having said that, I worry that banks, which essentially borrow short term ,are funding mortgages, which are essentially long term. The Reserve Bank stress-testing is intended to assess the damage that might occur but, ultimately, the backup to a systemic breakdown is the Reserve Bank – they almost had to intervene for this sort of thing in late 2008 when the GFC began.


‘It was not that the land prices were too high. Farmers had borrowed to purchase their farms and with lower revenue they could no longer service the debt.’

I am trying to get across that if all land prices were to double it would not matter, until someone sold their land and the purchaser raised debt to buy it. Debt is the problem, not the price of land. (More strictly it is the ability to service the debt.)


‘One factor behind this equation in recent times ... is that it has made economic sense to run farms at break-even or a small loss, with the (tax free) capital gain on the fast appreciating land making up for the foregone profits (and minimising tax).’

Equally true for rental housing.

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