Dairy debt lifts as farmers absorb last two losses
The average dairy farm should move into positive cashflow this season but the sector’s bank debt has increased to $21.50 per kilogram of milksolids, says Reserve Bank Governor Graeme Wheeler.
That compares with $20.10/kg in September 2014, he said at the release of the bank’s November financial stability report.
Total bank lending to the dairy sector as at June was $40 billion, about 10 per cent of total gross lending of $389b.
The recent recovery in dairy prices was expected to return the average farm to profitability this season.
But the sector was vulnerable to future shocks because farmers have had to borrow to absorb losses over the past two seasons, Wheeler said.
Dairy prices rose 3.5 per cent at the latest Global Dairy Trade action, the eight rise in the past nine auctions.
Some farms remained under pressure and problem loans were likely to continue to increase for a time, Wheeler said.
Dairy debt, along with housing indebtedness, continued to be a risk to the financial system.
Dairy prices had increased 69 per cent between July and November, mainly supported by falling global production, he said. But the outlook for dairy prices was mixed.
Future European production would depend on the impact of the EU’s official support for dairy farmers, which had significantly increased since May.
The intervention had led to Europe building big stockpiles of skim milk powder and the eventual release of these stocks, along with continued growth in US dairy production, could weigh on prices, Wheeler said.
On the demand side, there was considerable uncertainty about Chinese inventory levels and their impact on future demand, despite China’s annual imports of whole milk powder in the nine months to September increasing by 20 per cent.