Surge in lending for horticulture needs watching: Reserve Bank

Lending for kiwifruit production leads new bank appetite for horticulture. Photo / File

Banks' lending for horticulture, led by the kiwifruit industry, is growing by 15 per cent a year and will need watching for associated emerging risks, says the Reserve Bank in its latest Financial Stability Report.

The risk was in light of potential labour constraints in the near term due to border restrictions, the six monthly report on the New Zealand economy said.

Banks had a limited appetite for new dairy lending, reflecting concerns around cost compliance with new environmental regulations.

However the report also noted that uncertainty about global economic conditions is adding to limited demand for dairying lending, particularly for farm expansion.

The report said the agriculture sector continued to show relatively less strain from Covid-19 impacts than other business sectors.

Food production was considered essential in the higher alert levels, allowing food processors to continue operating during the restrictions.

The sector's resilience had also been boosted by a comparatively rapid recovery in the economy of China, New Zealand's biggest trading partner.

Banks' appetite for overall agricultural lending had held steady, with a shift continuing towards more diversification in their portfolios to limit exposure, the report said.

However long term vulnerabilities remained "a considerable concern", it warned.

Dairy farmers appeared to be taking a more cautious approach to long-term capital investment in light of the global economic recession and ongoing consequences of Covid-19.

Banks had been working with over-extended dairy farmers and encouraging them to deleverage by taking advantage of favourable commodity prices and historically low interest rates to repay loan principal and reduce their vulnerability to another dairy downturn.

There have been two dairy downturns in the past 10 years and a number of dairy farms remained highly vulnerable, needing a high milk price just to stay operational, the report said.

Restrictions on foreign investment continued to exacerbate illiquidity issues in the farm land market.

Banks' limited appetite for new dairy lending reflected concerns about compliance cost impacts on farm incomes, such as stock exclusion from waterways, the nitrogen fertiliser cap and the introduction of agriculture to the Emissions Trading Scheme in the near future, said the report.