Funding the flow of milk: dairy industry capital requirements

Abstract

The dairy industry in New Zealand began after the importation of two cows and a bull in 1814 with the first dairy exports leaving our shores in the 1840's. Since then the dairy industry has grown to a point were in 2010 it directly contributed $5b worth of value (GDP) to the New Zealand economy, the equivalent of 2.8% of GDP. Globally, New Zealand is the largest exporter of dairy exported products, representing approximately one third. The industry has worldwide recognition for a grass based production system, technology, wealth creation and profitability amongst others. Over the past 10 years the growth of the industry has speed up to a point where 1.685b kgMS were produced in the 2011/12 season - a 41% rise from 10 years earlier. Due to New Zealand's competitive advantages the industry is well placed to continue to grow. The Situation and Outlook for Primary Industries in 2013 forecast the milk production will continue to grow y.o.y by 4% per annum until 2017. The purpose of this report is to understand the capital invested in the industry and what this could mean for funding future growth? This question has been of personal interest for two reasons: Firstly, there appears to be an increasing amount of media coverage to the total value of debt within the dairy industry. Headings such as "Debt weighing down dairy sector", "Dairy farmers deep in debt", "Concern over level of dairy farm debt" have been seen in the media. The majority of these articles site the growing total debt in the dairy industry saying this leaves the industry more vulnerable. I feel a better analysis is required to make these judgments. Secondly, the future growth of the dairy industry will require capital. The question is: What is the more desirable way for this growth to be funded? And, can we learn anything from the past? Funding this growth correctly will be crucial to not only building a sustainable industry but also New Zealand's economic prosperity due to its contribution to the economy.