Jamie Gray is a business reporter for the NZ Herald

Dairy doldrums hit farm values

Slide comes as banks gauge potential losses.
Sales volumes for dairy properties are easing while activity around grazing and horticultural land remains steady. Photo / David Kerr
Sales volumes for dairy properties are easing while activity around grazing and horticultural land remains steady. Photo / David Kerr

Dairy farm values are tumbling, according to data from the Real Estate Institute of NZ, which comes after Reserve Bank "stress tests" showed banks could lose up to $3 billion on a sector under pressure.

The institute said its dairy farm price index fell by 14.3 per cent in the three months to February compared with the three months to January. Against February 2015, the index was down by 20.9 per cent.

The dairy farm price index adjusts for differences in farm size and location.

Across all farms, the median price per hectare for properties sold in the three months to February was $25,970 compared to $28,009 recorded for the February 2015 period - a fall of 7.3 per cent. The median price per hectare fell by 5.2 per cent in February compared to January.

Sales data for the three months reflected a continuation of trends from the previous period, with a steady level of sales volumes for grazing and horticultural properties but an easing of activity for dairy and finishing properties, REINZ rural spokesman Brian Peacocke said.

"Favourable climatic conditions over much of New Zealand and the continuation of good returns for beef and horticultural sectors are bright spots on the horizon which ... is being dominated by a gathering of clouds [for dairy]," Peacocke said.

The REINZ data follows the Reserve Bank's "stress test" this week which showed the banking system was robust enough to handle the current dairy sector downturn.

Low global milk prices are generating "significant financial pressure" for dairy farmers, with around half of the dairy sector currently experiencing a second consecutive season of operating losses, the bank said.

The Reserve Bank last year asked the five largest dairy-sector lenders - ASB Bank, ANZ Bank New Zealand, Bank of New Zealand, Westpac New Zealand and Rabobank New Zealand - to participate in the test.

The Reserve Bank tested two scenarios, including dairy land prices falling by 20 per cent and 40 per cent.

On average, banks reported losses under the two scenarios ranging between 3 per cent and 8 per cent of their total dairy sector exposures.

Bank lending to the dairy sector stands at around $38 billion, meaning an 8 per cent loss would equate to roughly $3 billion.

Fonterra this month cut its farmgate milk price forecast for this season to $3.90 a kg of milksolids from a previous forecast of $4.15, compared with an average breakeven point for most of $5.25.

The co-op will report its first half result next week.

Prices at the GlobalDairyTrade auction this week went against market expectations and registered a 2.9 per cent decline, more than wiping out a 1.4 per cent gain in dairy product prices earlier this month.

Heading down

• Dairy farm price index fell 14.3% in three months to February compared with January.

• Against February 2015, the dairy farm index was down by 20.9%.

• $25,970 median price per hectare across all farms, down 7.3% on the previous year.

- NZ Herald

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