Tuesday, 06 December 2016 08:55

Dairy debt risks NZ's financial stability

Written by 
Reserve Bank governor Graeme Wheeler. Reserve Bank governor Graeme Wheeler.

Dairy remains a key risk to New Zealand’s financial stability says the Reserve Bank.

The bank is reviewing the capital commercial banks must hold as sufficient provision for the dairy industry’s debt.

And it is concerned about housing market vulnerability and bank funding pressures.

Auction prices for whole milk powder have increased 69% since July and Fonterra has raised the farmgate forecast to $6/kgMS, which is likely to return the average dairy farm to profitability, says Reserve Bank governor Graeme Wheeler in his six monthly financial stability report.

“Nevertheless, parts of the dairy sector remain under significant pressure,” he adds.

“In aggregate, dairy farms have reduced costs, but there is significant variation in cost structures across farms. Even with the improvement in dairy payouts, some farms may struggle to achieve profitability, especially given that 20% of farms account for about 50% of overall dairy debt.”

Debt levels have been stretched further as dairy farms have borrowed working capital to absorb operating losses over the past two seasons. High debt levels leave the sector vulnerable to any weakness in dairy prices.

With recent price improvements, credit losses are likely to be lower than suggested by the more severe scenarios in stress tests of banks’ dairy exposures last year, Wheeler says. Nevertheless, problem loans are likely to increase further, as losses take time to materialise.

Therefore, he says, banks should ensure provisions and other buffers are appropriate for expected losses.

More like this

Rabobank cuts loan rate

Rabobank New Zealand will reduce the variable base rate on its rural loans by 0.5%, effective from 16 October 2024.

Ouch!

OPINION: Your canine crusader notes that the Reserve Bank forecasts that more than 80% of beef and sheep farmers would be unprofitable if any future emissions pricing on carbon dioxide equivalent hit $150 per tonne.

Featured

Fencing excellence celebrated

The Fencing Contractors Association of New Zealand (FCANZ) celebrated the best of the best at the 2025 Fencing Industry Awards, providing the opportunity to honour both rising talent and industry stalwarts.

B+LNZ launches AI assistant for farmers

Beef + Lamb New Zealand has launched an AI-powered digital assistant to help farmers using the B+LNZ Knowledge Hub to create tailored answers and resources for their farming businesses.

National

Machinery & Products

JDLink Boost for NZ farms

Connectivity is widely recognised as one of the biggest challenges facing farmers, but it is now being overcome through the…

New generation Defender HD11

The all-new 2026 Can-Am Defender HD11 looks likely to raise the bar in the highly competitive side-by-side category.

» Latest Print Issues Online

Milking It

Buttery prize

OPINION: Westland Milk may have won the contract to supply butter to Costco NZ but Open Country Dairy is having…

Gene Bill rumours

OPINION: The Gene Technology Bill has divided the farming community with strong arguments on both the pros and cons of…

» Connect with Dairy News

» eNewsletter

Subscribe to our weekly newsletter