One in four dairy farmers in negative cashflow this season, Wheeler says

Wednesday 13th May 2015

Another year of sagging dairy prices would be a concern for New Zealand's economy and especially for the 25 percent of farmers currently carrying debts above 65 percent of the value of their assets and currently trading in negative equity, says Reserve Bank governor Graeme Wheeler.

Expanding at a parliamentary hearing on this morning's release of the central bank's six monthly financial stability report, which imposed new macro prudential restrictions on lending on Auckland housing, Wheeler said "another year of low prices, that would be a worry for the economy, no question, and also that would be a worry for farmers in terms of their debt capacity."

Prices for whole milk powder dropped an average 1.8 percent to US$2,386 a tonne in last week's GlobalDairyTrade auction, extending its decline over the past five auctions to 27 percent. Those low prices, which had been caused in part by the Chinese build-up of inventories during 2013 and the falling cereal prices which allowed less efficient farmers to retain some margin, are seen as one of three key risks to New Zealand's financial stability if they were to linger, the Reserve Bank said in its six monthly financial stability report out today.

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 $34 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.

Wheeler told Parliament's finance and expenditure select committee that the bank estimates prices will return to an equilibrium price over the medium term of between US$3,200 and US$3,800 per tonne, though market pricing only suggests it will rise to about US$2,700/tonne by the end of the year.

"If you saw the dairy price just remain at low levels for a considerable period: one, that negative cash flow problem intensifies; two, you'd probably start to see dairy farm prices fall which would compound the situation," Wheeler said.

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 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.

Deputy governor Grant Spencer told politicians that lending on farms had been fairly stable in recent years, and still accounted for the bulk of the sector's debt. Farmers had increased borrowing to fund short term working capital.

Spencer said those farms experiencing negative cash flow in the current season are able to source funding from the deferred payout from the prior season, short term bank loans, and cutting back on investment intentions, though that can't last forever and the more highly geared farms would find themselves struggling to service their loans.

"From our perspective, there is some degree of optimism that farmers hate to walk away from the land," Spencer said. "They they won't do it lightly and will go to some extraordinary lengths to continue to service the mortgage."

BusinessDesk.co.nz

Comments from our readers

No comments yet