Very low dairy prices have so far not translated into widespread forced sales of farms, but the coming spring and summer periods will be the acid test for many.
Farmers enjoyed a record milk price of $8.40 a kg in the 2013/4 season.
China's withdrawal from the market in the following year saw the price slump to $4.40 a kg, but Fonterra's carryover system of payment meant the benefit of the record 2013/4 year could be passed on, so the effective milk price came to $5.90 a kg.
There's been no such luck in the 2015/6 season just ended, with Fonterra sticking with its $3.90/kg farmgate milk price - well below the average break even point of $5.25 kg.
Last season's low milk price, together with the current year's forecast of 4.25/kg, means that dairy sector is heading towards two consecutive years of negative cash flows for the first time since records began in the 1960s.
There have been few forced sales to date, despite dairy being heavily over-represented in the agricultural debt statistics, Real Estate of NZ rural spokesman Brian Peacocke said.
"If there was to be a next round of sales it would not happen until spring because farmers have pretty much battened down now for the winter," he said. "Once the reality of the reduced flow of income emerges and we move into the spring, that's when people will make their decisions."
Peacocke said banks have so far been been supportive and a number of farmers have been "in conversation" with them to decide on a future course of action.
"I don't think anyone is keen on seeing a rash of forced sales - it doesn't do anyone any good," he said.
"But at the moment, it's too early to tell."
Farm prices are down by about 13 per cent over the past year or so, but analysts are not reading too much into the decline because the number of farm sales is well down.
I don't think anyone is keen on seeing a rash of forced sales - it doesn't do anyone any good.
ANZ's rural economist Con Williams said debt had accumulated in the sector and had resulted in expanded supply but had also served to pump up land prices.
"During any downturn, those who do have high debt loading need to adjust their business structures by selling non-core assets," Williams said.
"So it is severe and we have had year one and we are heading into year two of cash flow losses."
In the Reserve Bank's latest financial stability report, Governor Graeme Wheeler said the level of problem loans in the dairy sector was expected to increase "significantly" over the coming year.
The bank noted that there had been relatively few forced sales to date which, alongside low interest rates and a positive medium-term outlook, had provided some support for farm prices.
"Nevertheless, prices have fallen 13 per cent over the past year and there is a risk of further price declines if cash flow pressures result in more forced sales," he said then.
While increasing dairy sector risk may not pose a threat to financial stability in isolation, it comprises part of a significant overall financial stability risk when considered in combination with the current global outlook and elevated domestic household sector risks, Wheeler said.
Dairy has the lion's share of agricultural sector debt.
Reserve Bank data shows dairy sector debt has gone from almost $29 billion in 2009 to $40 billion.
But dairy farm production, too, has gone ahead in leaps and bounds.
Over the same comparative periods, production went from 1.39 billion kg to 1.89 billion - a 34 per cent increase.
Assessing the exact level of forced sales is not easy as banks put in place a "work out" process for distressed businesses.
The spring and summer period could be challenging for the market because farm confidence will not be great if milk prices remain below DairyNZ's estimated break even point of $5.25/kg.
Banks are also expected to tighten up on lending during this period if low prices persist.
ANZ expects the milk price this year to be in the high $4/kg mark and for the medium price to settle at around $5.50 to $6.50 a kg.
DairyNZ estimates that about 30 per cent ($11-$12 billion) of dairy debt is carried by 10 per cent of dairy farmers.
Between 45-50 per cent ($18-$20 billion) of debt is carried by 20 per cent of the highest indebted dairy farmers.
The farmers group says it is the combination of high debt and high farm costs that will require the most urgent action.
Where the farm debt is
• High debt level is concentrated in a relatively small part of the sector.
• About 30 per cent ($11-$12 billion) of dairy debt is carried by 10 per cent of dairy farmers.
• Between 45-50 per cent ($18-$20 billion) of debt is carried by 20 per cent of the highest indebted dairy farmers.
• The Reserve Bank has recently released figures saying that dairy debt has increased to $40 billion.
• At 1.860 billion kg MS, this equates to $21.50/kg MS average debt, up about $2/kg MS over the last couple of seasons.
• An average farm producing 150,000 of milk solids would have over $3.2 million in term liabilities and be paying about $200,000 in interest payments a year or $1.30/kg.
• A 1 per cent in interest rates would increase interest expenditure by .22/kg MS.
- source DairyNZ, Reserve Bank