Trade uncertainty offsets strong NZ commodity prices - Rabobank

Rabobank NZ CEO Todd Charteris says trade uncertainty is taking the edge off strong NZ commodity prices. Photo/NZ Herald.

Uncertainty on the world trade front is taking the gloss off what is looking like being the third good year in a row for New Zealand agriculture, Rabobank NZ chief executive Todd Charteris said.

The Dutch-owned bank's view is that favourable production conditions and strong commodity pricing are likely to continue throughout 2019 and these factors, combined with an anticipated weakening of the kiwi dollar, will set up a further profitable year for farmers across New Zealand's major agricultural sectors.

"Commodities markets are really, really positive, which is fantastic," Charteris told the Herald in an interview. "But there are these uncertainties on the horizon."

Among those uncertainties were the fallout from rising trade tension between China and the United States and likely changes to the trade relationships that New Zealand has with Britain and the European Union once the UK finally exits the trade bloc.

There are were also big challenges on the domestic environmental regulatory front and changes are afoot for DIRA - the legislation that governs the dairy industry.

"Farmers have been dealing with a lot of these aspects for quite some time now, and our role is to help support them through that," Charteris, who was appointed CEO a year ago, said.

In its latest financial stability report, the Reserve Bank said indebtedness remained high in the agriculture sector, particularly for dairy farms.

And according to Reserve Bank data, Rabobank NZ has the highest proportion of non-performing loans among the banks at 2.5 per cent.

But Charteris said he was happy with the bank's loan book. "We don't expect to see any significant changes to the performance of our loan book - we have a well-performing book," he said. Actual losses and the level of provisions remained very low, he said.

Charteris said the rural lending specialist's customers were taking advantge of higher product prices to consolidate and repay debt.

Farmers' acquisitions of new property had also slowed, he said.

Charteris said he was supportive of the Agricultural Debt Mediation bill, due to go before parliament this year.

The proposed legislation will put in place a mandatory mediation process before the appointment of a receiver in respect of agricultural debt.

Another aspect of the changing regulation will be in the form of the Reserve Bank's plan to improve banks capital adequacy evels, likely to be phased in over a five-year period.

Rabobank NZ, which retains its earnings instead of paying a dividend to the parent, is already well capitalised, he said.

"One of our advantages is that ever since we have been in New Zealand, all our profits have been retained here so we have never paid a dividend," he said.

"We are working through the numbers just like everyone else is, but in terms of what the proposal looks like, and whether we can alone or whether we would need to ask our parent for more capital," he said.

Over the course of the year, Charteris said he expected the level of uncertainty faced by farmers to reduce.

Rabobank NZ, country's sixth biggest bank, said in its latest agriculture outlook that milk production this season was likely to be a record, but that it would be hard to replicate in 2019/20 due to land use competition and environmental constraints.

Economists are also looking at revising up this season's farmgate milk price forecasts into the low $6.00s per kg of milksolids.

The bank expects beef prices to hold above their long term average levels, despite some softening from increased global beef supplies and price pressures in the US market.

In sheepmeat, the bank expects farmgate prices for lamb and mutton to remain elevated on the back of solid demand growth and limited supply growth here and in Australia.

Horticulture exports are expected to grow, even though the sector is hampered by labour shortages, the bank said.