Most dairy farms set for profit: Reserve Bank
The Reserve Bank said most New Zealand dairy farms are expected to be profitable in the 2017-18 season but they remain more indebted than other farm sectors.
Commercial banks’ non-performing loans to the dairy sector have declined, the central bank said in its financial stability report.
Global dairy prices have fallen in recent months, but remain well above their mid-2016 levels, the bank noted.
Banks have supported farms through the recent dairy price downturn, which has helped to limit loan defaults, it said.
“It is appropriate for banks to continue working with the sector to use improved cash flow positions to re- duce debt levels in the sector over time,” it said.
Fonterra has a milk price forecast of $6.75/kg of milksolids for this season, up from $6.12/kg in 2016/17.
Private-sector economists expect to see a revision down to about $6.25 to $6.50/kg when Fonterra reviews its milk price forecast next month.
If so, farmers would still be ahead of Dairy NZ’s latest estimate of breakeven of about $5.20 to $5.25/kg.
Farm debt ballooned when prices slumped to $3.90/kg in 2014/15 and to $4.40 kg in 2015/16.
The Reserve Bank said although dairy prices have eased recently, whole milk powder was still about 35 per cent higher than in mid-2016 and butter prices have almost doubled.
Combined, these two products account for 60 per cent of the value of New Zealand’s dairy exports.
Banks are reporting fewer loans that need to be closely monitored and have started to reduce their provisions against losses on their dairy loans, the report said.
Non-performing loans (NPLs) have fallen by $100 million since May and the share of banks’ dairy loans that are non-performing is now 1.6 per cent, against 1.9 per cent a year ago.
The recent peak in NPLs is much lower than the peak that followed the sharp decline in dairy prices in 2008.
During the recent downturn, bank lending to the dairy sector increased by $5 billion, or 15 per cent, mainly for working capital purposes. Farms also borrowed almost $400m through Fonterra’s soft loan scheme.
“With leverage in the dairy sector already high, this growth in debt has left the sector more vulnerable to another period of low dairy prices or an increase in interest rates,” it said.
“Within banks’ agriculture portfolios, lending to the dairy sector poses the greatest risk to financial stability as it accounts for 10 per cent of total bank lending.”
The next largest agriculture sector, sheep and beef, accounts for just 3 per cent of total lending.
The dairy sector is also more indebted, relative to its income and assets, than other agriculture sectors.
Debt in the dairy sector is estimated to be more than three times income, compared with a debt-toincome ratio of about two for the sheep and beef sector.
Dairy lending also tends to be at higher loan-to-value ratios, meaning more risk if farm prices fell, it said. tion systems firm Junifer Systems for $74.6m and European airport software developers Blip Systems and CA Plus for about $20.3m.
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