In his first Financial Stability Report, Reserve Bank governor Graeme Wheeler fingers the dairy sector as “vulnerable” to adverse external shocks. The concern comes as debt growth again begins moving upwards in the agricultural sector, at a rate of 4.5% a year, up from zero growth at the start of 2012.
In the twice yearly report the governor paints a panicky scenario of elevated debt levels, diminished commodity returns and lowered land values. However, he moderates that concern by acknowledging interest rates are expected to remain low for some time, making debt servicing easier for many farmers.
His concerns come as the sector moves through one of its tightest cash flow periods for the season, with dairy farmers receiving an advance payment for the season’s milk of $3.85/kgMS, down from $4.40/kgMS this time last year.
This is at least being compensated to some extent by a season running ahead of even last year’s bumper production year – up 4% nationally to date.
The continuing surge in dairy debt has seen it balloon from $24 billion in 2008 to $30b this year. Reserve Bank analysts have attempted to get under the hood on the debt distribution and present a grim picture of the country’s most indebted dairy farmers.
Using the value of loans to farm values (the loan value ratio or LVR) highlights the corrosive effect on farmers’ equity of minimal debt repayment and a 20% drop in farm values since 2008.
Back in 2008 two thirds of the then $24b dairy farm debt was held by farmers with at least 40% equity in their property. That situation is almost reversed entirely today with 60% of dairy farm debt held by farmers with less than 40% equity in their property. Half that riskier debt is held by farms with 20% or less equity. Back in 2008 only 6% of the debt was held at this end of the risk scale.
The governor noted the proportion of debt held at that risky end of the debt spectrum had increased significantly and was likely to make banks less comfortable forbearing on troubled operations.
The impact on those farms with higher debt levels is they face a breakeven point 70c/kgMS higher than average debt farms. The bank’s analysts predict at the current projected payout 36% of dairy farms this season will have negative cash flows if their farm working expenses do not change from last season. In a worst case scenario if the payout fell to $5.00/kgMS it would hike up to 64%.
The report concludes the earlier equity buffer enjoyed by farmers back in 2008 when returns first slipped had been eroded thanks to declining land values. This implied banks might consider foreclosing on a larger proportion of farms if the payout fell sharply and remained weak.
To read the Reserve Bank Financial Stability Report visit: http://www.rbnz.govt.nz/finstab/fsreport/fsr_nov12.pdf
