Sagging dairy prices push a quarter of farms into negative cash flow, RBNZ says

Wednesday 13th May 2015

Persistently low dairy prices are keeping New Zealand farmers under pressure with about a quarter of dairy farms experiencing negative cash flow in the current season, according to the Reserve Bank.

The dairy sector, which produces New Zealand’s biggest export commodity, is seen as a risk to the nation’s financial stability, with low global prices for milk products weighing on cash flow, particularly for those farms with elevated levels of debt. Large deferred payments from last season’s record payout have helped mitigate the decline in incomes, though the Reserve Bank still sees risks for the sector if prices remain low.

The Reserve Bank said there is significant cross over between farms estimated to have negative cash flows in the current season and those with high loan to value ratios above 65 percent.

About 25 percent of farmers, who account for about 32 percent of the sector’s $29 billion in debt, are estimated to have negative cash flow this season as milk prices hang near five year lows and the outlook remains subdued. The bank estimates about 11 percent of debt is held by farms with high loan to value ratios of above 65 percent.

“It is likely that the number of foreclosures among these indebted farms will eventually increase if weak cash flow persists for multiple reasons,” the bank said in its six monthly financial stability report.” Bank losses associated with these foreclosures would be exacerbated if land values fall alongside weaker farm incomes.”

The Reserve Bank has previously cited concerns about the level of indebtedness among a core group of dairy farmers, with about 10 percent of farms accounting for a third of the sector’s debt.

“These farms tend to have higher levels of debt relative to output, leaving them more susceptible to worsening sectoral conditions,” the bank said.

The Reserve Bank said private lenders have a “largely positive view” on the long term outlook for the dairy sector, and have been easing credit conditions for working capital.

The dairy sector’s fortunes will be largely influenced by how much Chinese milk demand recovers after it tapered off last year following a build up of inventories in 2013.

“Some recovery in global milk prices is expected in the 2015-16 season, although there is considerable uncertainty over the timing and extent of the recovery,” the bank said. “Assessing the balance of these global forces is difficult, but there is a significant risk that milk prices remain low for an extended period.”

BusinessDesk.co.nz

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