NZ brokerage says farm insolvencies could 'explode'

REINZ Dairy Farm Price index fell by 24.1 per cent, year on year, in April. Photo / Sarah Ivey

OM Financial said farm insolvencies could "explode" if farm prices fell further.

In its monthly report, the New Zealand brokerage said the average dairy farmer was likely to post a further loss this coming season, leading to deterioration on the liability side of farmer's balance sheets.

At the same time, the asset side of dairy farmers' balance sheets was being eroded by weakness in land and livestock prices, OM Financial said.

The Real Estate Institute of NZ's (REINZ) Dairy Farm Price index fell by 24.1 per cent, year on year, in April.

"This represents approximately 70 per cent of total dairy farmer assets - livestock comprise a further 10 per cent and plant and equipment a further 3 per cent - and given its remarkable correlation with the GlobalDairyTrade Price Index, we see scope for further double-digit declines in land prices over the coming season," OM Financial said.

The erosion of farmer balance sheets from both the asset and liability sides was leading to a rapid deterioration in farmer loan-to-value ratios (LVR), it said.

"DairyNZ estimates that the average LVR was 47 per cent in 2014/15 while our calculations suggest that it's risen to 55 per cent today and has scope to rise to 65 per cent over the coming year given our projections for credit off-take and a (conservative) 10 per cent fall in land prices," OM Financial said.

"Should land prices fall 20 per cent, our back-of-the-envelope calculations suggest that the average LVR would rise to 78 per cent over the coming year, suggesting that insolvencies could explode," it said.

Fonterra last month left its 2015/16 farmgate milk price at $3.90/kg and pitched its opening forecast for 2016/7 at $4.25/kg - well below Dairy NZ's estimated break-even point of $5.25/kg.

Dairy product prices were steady at last week's GlobalDairyTrade auction, but a 4.5 per cent drop in the price of whole milk powder - the key component of Fonterra's farmgate milk price - has weighted on sentiment.

AgriHQ dairy analyst Susan Kilsby said at the time that it was difficult to see prices moving substantially higher before the end of the year.