Reserve Bank rules bleeding farmers dry - Feds
There are calls for the Reserve Bank to drop its banking capital rules, which Federated Farmers says is costing farmers a fortune.
But even the worst case scenarios pose no threat to bank stability, Reserve Bank governor Graeme Wheeler said, when he reduced the official cash rate (OCR) by 25 basis points to 2.25% last Thursday.
The outlook for global growth had deteriorated since December due to weaker growth in China and other emerging markets and slower growth in Europe, he said. Domestically the dairy sector faces difficult challenges, but domestic growth was supported by inward migration, tourism, construction and accommodative monetary policy.
"There are many risks to the outlook. Internationally, these are to the downside and relate to the prospects for global growth, particularly China, and the outlook for global financial markets," he said.
The dairy sector was among the main domestic risks which also included a decline in inflation expectations, the possibility of continued high net immigration and pressures in the housing market.
Wheeler said there was no question that dairy was a challenging sector -- particularly for dairy farmers. Whole milk powder prices were down 60% since February 2014.
The "dynamics were difficult internationally" with prices still up overseas, production growth in the US and Europe and the Russian embargo.
The Reserve Bank will release its updated report on stress in the dairy sector in its bulletin this week. Wheeler said they looked at a number of scenarios. After a lot of work with DairyNZ, analysis shows the average break-even price is about $5.30/kgMS.
Under the most stressed scenario, they modelled the current price staying there for the next three seasons. Farm prices would fall about 40%. Under that worst case model, 44% of the dairy debt would be impaired and the default rate would be 10-15% of dairy lending.
It is a highly stressed scenario, Wheeler said. Agricultural lending is 10% of bank lending and a lot is dairy.
"Do the banks have the capital reserves to accommodate that? We believe they do."
Wheeler said China is building up a number of imbalances that are serious but they don't see a "hard landing" there soon.
"If China had a significant and prolonged deflation it would inevitably spread deflation around the world," he said.
Any future cut, or more than one cut, will be based on data.
There were many risks to the outlook but New Zealand was in a better place than three years ago when it had deficits and the projection of debt increasing, he said.
