Dairy an "area of risk": Reserve Bank

The Reserve Bank's report said 11 percent of farm debt was held by farmers with both negative cash flow and elevated loan to value ratios. Photo / NZME.

The Reserve Bank has singled out the New Zealand dairy sector as an "area of risk" for the financial system.

The bank, in its six monthly Financial Stability Report, said the Auckland property market had become "very elevated" and the country's financial stability could be tested if prices were to fall sharply.

"The second area of risk for the financial system relates to the dairy sector, which is experiencing a sharp fall in incomes in the current season due to lower international prices," the bank said.

Fonterra will late this month release its milk price forecast for 2015/16 and indications are that it will be towards $5.00 a kg of milk solids, down from last season's record price of $8.40 a kg. The current season's forecast is for a milk price of $4.50 a kg.

The cooperative is expected to release its 2015/16 forecast after its next board meeting on May 27 while uncertainty abounds around oversupply, Russia's dairy import ban, increased production from the European Union, and slack demand from China.

The Reserve Bank's report said 11 percent of farm debt was held by farmers with both negative cash flow and elevated loan to value ratios.

Financial stress in the dairy sector could rise markedly if low global milk prices persist beyond the current season, it said.

"The extent of recovery in Chinese milk demand, following a large build-up of inventories in 2013, will be an important influence on global milk prices," the bank said.

Reserve Bank governor Graeme Wheeler said many highly leveraged farms are facing negative cash-flows, and the risks will become more pronounced if low milk prices persist beyond the current season.

In its report, the bank announced changes to the loan-to-value ratio policy, effective from October 1, requiring residential property investors in the Auckland Council area to have a deposit of at least 30 per cent.