Banks say more heavily indebted New Zealand dairy farmers will be asked to sell up as non-performing loans increase.
DairyNZ estimates 85 per cent of dairy farmers will lose money this season compared to 49 per cent last season after Fonterra Cooperative Group this week followed other dairy companies in cutting its forecast farmgate milk payout.
The drop of 45c per kilogram of milk solids to $4.15/kg for the 2015/16 season meant an $800 million drop in the industry's dairy revenues, or $67,000 less in cash revenue for the average farm.
Agricultural industry lender Rabobank has forecast cashflows will remain at low levels well into the 2016/17 season, with global dairy prices unlikely to return to sustainable levels until late this year.
Bankers spoken to by BusinessDesk say they're prepared to keep supporting the industry with long-term prospects still looking good. However, they and rural advisers say some of the most marginal farmers are having their debt capped with no further working capital supplied, while others are being urged to sell.
One rural adviser working with loss-making farmers, who did not want to be named, said his clients were having tough conversations with bankers that varied from "what's your exit plan?" to "what's your action plan to reduce debt?".
Federated Farmers dairy chairman Andrew Hoggard said he had heard of farmers exiting the sector and about others getting the "hard word" from banks. He said it was important to get independent advice.
It's better to be proactive and put yourself in the driver's seat and make the hard calls yourself rather than wait for someone else to make decisions for you that may not be ideal if you had more time.
SHARE THIS QUOTE:
Dairy farm debt hit $37.8 billion in June, from $34.6 billion the year before. The Reserve Bank has estimated about 30 per cent of that debt is concentrated among 10 per cent of farms. What's more, 11 per cent of total dairy farm debt is held by farms with negative cashflow and loan-to-value ratios above 65 per cent.
In a December update, the Reserve Bank said assuming all non-performing loans default, the top five rural lenders could lose between 2 to 14 per cent of their dairy portfolios. But it said losses for the banking system should be manageable.
ANZ Bank New Zealand, the country's largest rural lender, said the recovery was taking longer than expected but the industry's long-term outlook remained positive.
General manager agri Ross Verry said tough conversationswere being had as two consecutive seasons of negative cashflows would see a "deterioration" in numbers of non-performing loans.
We're saying to people be very careful about their assumptions on their return on investment and payouts.
SHARE THIS QUOTE:
Rural interest rates have fallen in recent years in line with the downward trend in the official cash rate, but despite the Reserve Bank indicating an easing bias due to low inflation, upward pressure is likely this year on credit margins.
Verry said that was due to increased risk and wholesale costs rising since the end of 2014 and, more recently, on global volatility.
John Janssen, head of agri for Bank of New Zealand which is the second-largest dairy lender, said "there was no way to paint that up" with rural interest margins likely to rise although they "won't be massive increases".
Verry said there had been a small number of receiverships and forced farm sales but "only a very few". However, ANZ was seeing more businesses under stress, he said.