The Reserve Bank says agriculture is faring quite well, but parts of the sector remain vulnerable due to high debt. Photo / Hawke's Bay Today
The Reserve Bank says agriculture is faring quite well, but parts of the sector remain vulnerable due to high debt. Photo / Hawke's Bay Today
New Zealand agriculture is faring relatively well but vulnerabilities remain, particularly with much of the country in drought, the Reserve Bank said in its latest financial stability report.
The central bank in its report said the New Zealand financial system was in a solid position to both weather thesignificant economic impact caused by the Covid-19 pandemic and support New Zealand's recovery.
But it said lending to the agriculture sector was "a key concentration of risk" for the system, accounting for around 13 per cent of bank lending - about two thirds of which is to dairy.
"The sector is vulnerable to income shocks given its dependence on global commodity prices, and pockets of dairy lending have yet to recover from the 2015 downturn," the Reserve Bank said.
"Low serviceability metrics indicate the agriculture sector has entered this crisis with a limited ability to take on more debt to absorb temporary falls in income."
Northland, Auckland, North Waikato and Hawke's Bay have faced persistent drought conditions since December, creating further stresses, it said.
Some highly indebted dairy farms could face solvency and liquidity pressures if milk prices were to fall materially.
Fonterra this month kept its forecast underlying earnings for the year to July 31 at 15-25 cents per share and cast its current season forecast in a $7.10 - $7.30 per kg range - one of the highest yet.
However, its first stab at the 2020/21 forecast was in a very wide $5.40 - $6.90 per kg range. Break-even for most dairy farmers is estimated to be around $6/kg.
Before the outbreak became a pandemic, commodity prices for the agriculture sector were stable, allowing the sector to avoid much of the initial economic impacts, the Reserve Bank said.
Businesses in the primary sector were also generally able to operate under alert levels 4 and 3, unlike many sectors of the economy.
However, since Covid-19 became a global pandemic, the outlook had worsened somewhat.
Fonterra has set a wide milk price range for 2020/21. Photo / File
New Zealand dollar prices have fallen by around 8 per cent since January, while milk price futures for the 2020/21 season have fallen to around $6 per kg in May.
This is still above the low prices of the 2015 dairy downturn, when the payout including dividend for farmers fell below $5/kg.
"However, there remains a tail of highly indebted dairy farmers from that downturn, who generally require payouts above $6/kgMS to break even," it said.
"These farms could face significant stress if commodity prices continue to fall.
"Border restrictions will also place pressure on labour costs for sectors reliant on seasonal migrant workers such as horticulture, although rising unemployment in the domestic workforce may partially offset this."
Further borrowing to manage cashflows during a downturn in prices could also pose a further long-term risk to these sectors' ability to service debt, it said.
Elsewhere in its report, the bank said New Zealand's commodity export prices have performed considerably better than other global commodity classes.
The exchange rate had depreciated and partially insulated New Zealand commodity exporters from the deterioration in international conditions, albeit less than in previous crises.
