Sharechat Logo

Reserve Bank watching farming sector after drought adds more stress

Wednesday 8th May 2013

Text too small?

The Reserve Bank is "carefully monitoring" an already highly indebted agriculture sector after the recent drought in the North Island is likely to more strain on already stretched balance sheets.

The central bank has previously flagged concerns about the high level of indebtedness among farmers and its dairy concentration, and warns the recent drought could "expose financial vulnerabilities" across the sector, according to its six-monthly financial stability report.

"Parts of the agriculture sector in particular remain quite leveraged, and progress in reducing debt loads in recent years has been fairly limited," the bank said. "For these reasons, the Reserve Bank will be carefully monitoring developments in these markets for signs that systemic risks are increasing."

The Treasury estimates the drought will trim 0.7 percent from annual growth this year after the dry conditions sapped production and prompted farmers to cull livestock. That offset some of the gains dairy farmers were looking at as global milk prices surged during the dwindling supply.

The Reserve Bank expects the drought will cause lower incomes and higher costs for most farmers, and could hinder next season's production due to the culling of livestock.

"There is likely to be some increase in working capital borrowing from banks, in addition to recourse to government support programmes," the bank said. "Non-performing loans could rise amongst farmers who were already stretched before the drought."

Agricultural debt increased 5 percent over the past year after a spell of limited credit expansion, and has led to an increase in the debt-to-exports ratio.

Farmers have also had to contend with an "overvalued" exchange rate which has eaten into their returns.

Governor Graeme Wheeler today said the strength of the kiwi dollar continues to "hinder the rebalancing of activity towards the tradables sector that would assist in reducing external vulnerabilities."

The kiwi dollar's appreciation has been put down to the international environment of near-zero interest rates, meaning New Zealand's returns are relatively more attractive in an economy that is growing.

Father's Day SOON! Crazy Deals on ALL IRG Yearbooks - More than 50% OFF - $19.99 for 44th IRG Yearbook 2018-2019

  General Finance Advertising    

Comments from our readers

No comments yet

Add your comment:
Your name:
Your email:
Not displayed to the public
Comments to Sharechat go through an approval process. Comments which are defamatory, abusive or in some way deemed inappropriate will not be approved. It is allowable to use some form of non-de-plume for your name, however we recommend real email addresses are used. Comments from free email addresses such as Gmail, Yahoo, Hotmail, etc may not be approved.

Related News:

NZ dollar rises after Orr talks up the economy
Comvita posts $27.7m net loss on goodwill write-downs
Buyers emerge for Denton Morrell client book
WEL reviewing capital structure of fibre business
Cavalier announces strategic collaboration with NZ Merino Company
Delegat continues to invest after record year
Kiwibank's annual profit eases as fee income drops
TIL lifts operating earnings, watching for slowdown
Vector profit slides 44% on struggling HRV writedown
Steel & Tube returns to the black but says margins are squeezed

IRG See IRG research reports