Banks diversify their NZ agri debt away from dairy - RBNZ

The dairy sector is reducing its debt, the Reserve Bank says. Photo / File

Banks have continued to diversify their agricultural lending away from dairy and towards other sectors, especially horticulture, the Reserve Bank said in its latest financial stability report.

The rebound in international economic activity since the middle of 2020 had supported world commodity prices, the bank noted.

Prices of New Zealand export commodities remain close to recent high levels, although they have eased slightly from recent peaks in some industries, it said.

Fonterra recently increased its forecast payout for the 2021/22 season to a midpoint of $8.40 per kg of milksolids, which follows a final price for the 2020/21 season of $7.54/kg.

Elevated export prices have allowed the dairy sector to continue to deleverage, and banks have continued to encourage dairy farmers to improve their long-term viability, the Reserve Bank said.

In previous stability reports, the Reserve Bank had highlighted high dairy farm debt as a risk to the financial system.

In today's report, high export prices and low financing costs have resulted in the market for rural land becoming more liquid, with prices rising.

In addition, the price of carbon in the Emissions Trading Scheme (ETS) is at an historical peak, creating favourable conditions for conversion of marginal sheep and beef farming land into production and permanent forestry.

"By raising the value of alternative land uses, a sustained high carbon price will underpin rural land prices more generally, which will support farm owners to transition away from activities with high emission intensity," the bank said.

"So far, however, this conversion has been only on a limited scale."

Banks have reported broad internal work programmes underway on climate-related risk, including a focus on understanding the emissions profiles of business customers, especially in the agricultural sector.

A general concern noted by banks was variable data quality, which made it difficult to combine scientific and financial data to understand climate change impacts at a farm level, the central bank said.