Bank warns on dairy farm debt

Turnover in the market for dairy farms has declined over the past year, with annual sales dropping from around 310 to 260.

Federated Farmers says morale is more positive than it was a few months ago

The Reserve Bank has once again sounded a warning about dairy farm debt but, for the time being, farmers seem to be coping with the financial stress brought about by lower milk prices.

The central bank, in its latest six-monthly financial stability report, said it had asked the country's five biggest rural lenders to conduct a "stress test" of their exposure to dairy farm debt, and had encouraged them to set aside provisions to reflect a likely increase in problem loans to the sector if prices remain low.

The bank said many indebted farms were coming under increased pressure, which would be made worse if dairy prices remained low or if dairy farm prices fell significantly. New Zealand's top five rural lenders are ANZ, ASB, BNZ, Rabobank and Westpac.

"The banks are working with dairy farmers experiencing difficulty, and it is important that they continue to take a medium-term view when assessing farm viability," the Reserve Bank said.

"The banks' losses on dairy exposures are expected to be manageable but banks need to ensure that they set aside realistic provisions for the likely increase in problem loans," it said.

But Federated Farmers dairy chairman Andrew Hoggard said morale among farmers was more positive compared with where it was three or four months back, when dairy prices were at 10 year lows.

"We've had two drops in GlobalDairyTrade prices, but four big rises before that," he said.

"The [Fonterra] payout is back above the $4.00/kg mark and I don't think anyone is expecting it to drop below that," he said. "Expectations are that prices will firm up, but it's still not going to be a fantastic season, price wise," he said.

Hoggard said farmers were not expressing the same degree of pessimism that they had done, when prices had reached their trough, but that the pressure was nevertheless still on. "I think people are knuckling down and just doing it," he said.

Federated Farmers and the farmer-funded industry group, Dairy NZ, have set up a hotline for lower order sharemilkers - deemed to be the group most challenged by low milk prices.

"We haven't had many calls," he said. "Likewise there have been offers of free help from accounting firms, but demand has not been huge."

Reserve Bank Governor Graeme Wheeler noted dairy prices had shown some recovery since August, but that many indebted farms were coming under increased pressure, which would be made worse if low prices were sustained or if dairy farm prices fell significantly.

Farm prices held up relatively well during the 2014-15 season, supported by low interest rates and a positive long-term outlook for the sector.

However, turnover in the market for dairy farms has declined over the past year, with annual sales dropping from around 310 to 260. A sharp decline in farm prices would reduce the value of bank collateral, adding to the risk of a rise in non-performing dairy loans, the bank said.

Fonterra's farmgate milk price forecast stands at $4.60 for 2015/16, well short of the $5.30 a kg required for most farmers to reach break even.

For 2014/15, the price came in at $4.40/kg of milk solids which, together with the dividend, took the final cash payout to $4.65 a kg, compared with a record $8.50 per kg in the previous year.