Reserve Bank sees risk of increased New Zealand farmer defaults

The Reserve Bank says there is an increased risk of farmer defaults. Photo / NZME

The Reserve Bank says more farmers could default on their loans if the current difficult conditions persist.

The bank, in an extract from its upcoming Financial Stability Report, said the agricultural sector is facing difficult economic conditions because of low dairy, meat and forestry prices, high operating expenses and increased debt servicing costs.

Longer term, the sector faces uncertainty about the scale and timing of the costs of climate change, it said.

“Whilst defaults in banks’ agricultural lending portfolios are currently low, they are expected to increase and could accelerate if there is a prolonged period of high costs and low prices,” Kerry Watt, the bank’s director of financial stability assessment and strategy said in the report.

“It is encouraging that dairy prices have improved in recent auctions, and the deleveraging across the industry over the past few years means most farmers are well placed to manage challenges in the short term,” he said.

Watt says the economy is more reliant on the agriculture sector compared with most other advanced economies and we monitor emerging risks and issues closely to protect the stability of our financial system.

The agricultural sector represents 11 per cent of all bank lending.

Within agricultural lending, dairy takes the predominant share, at around 60 per cent, with beef and sheep as the second largest category at 25 per cent.

Across the agricultural sector, demand has declined from China, which typically purchased one-third of our dairy exports, 40 per cent of our meat exports and 60 per cent of New Zealand’s forestry exports.

”Defaults, payments overdue by more than 90 days, could increase materially if there is a prolonged downturn in export prices and demand,” Watt said.

Commercial banks have told the Reserve Bank that they are monitoring the situation and working closely with their rural customers.

“In the longer term, the agricultural sector faces climate-related challenges and we are focused on safeguarding the stability of the financial system against these risks,” he said.

”We are working with banks to improve their capability in assessing climate risks by stress-testing their agricultural portfolios against shocks, including drought, emissions pricing, and other long-term climate risks.”

The bank’s Financial Stability Report is due out on November 1.

Upward pressure has gone on Fonterra’s farmgate milk price after this month’s Global Dairy Trade auction registered a big gain for the fourth time in a row.

There were big price rises in the key products, with whole milk powder firming 4.2 per cent to US$3059/tonne, skim milk powder gaining 4.3 per cent to US$2659/tonne, and anhydrous milk fat jumping by 7.1 per cent to US$5310/tonne.

Prices overall were up by 4.3 per cent, despite China - usually the biggest buyer - not stepping up to a large degree.

Fonterra’s 2023/24 forecast milk price is a range of NZ$6.50 to $8.00 per kgMS, with a midpoint of $7.25 per kgMS, up 50 cents from its previous forecast but still below Dairy NZ’s estimate of break-even.

Meanwhile the Reserve Bank, in its latest bulletin, said lenders face various risks from climate change.

The bank last year worked with New Zealand’s biggest commercial banks to assess climate-related risks in two sets of sensitivity analyses, focusing on risks from drought and emissions pricing for their agricultural exposures, and flood risk for their residential mortgage exposures.

Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.