Friday, March 29, 2024

Banks’ dairy watchlist creeps higher

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The proportion of dairy loans on bank watchlists has been climbing, sending a signal that more farmers may start getting stretched as a period of low prices drags on. 
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Reserve Bank head of macro-prudential stability Bernard Hodgetts told Parliament’s finance and expenditure committee the level of loans on the watchlist had increased to about 4% to 5% of the country’s $38 billion of dairy debt. Banks typically put loans on a watchlist when there are signs they may come under stress, but before they are deemed non-performing.

“It’s been climbing. It’s certainly higher than the estimate of nonperforming loans in dairy, but that’s a fairly familiar pattern,” Hodgetts said. “During the global financial crisis, watchlist loans were considerably higher as a share of the portfolio. I think they were up over 10%.”

The downturn in the dairy sector has already had an impact on farm prices, which the Reserve Bank estimates is about 10% below its peak, Hodgetts said.

However, sales typically dry up during that period, making it difficult to evaluate the exact decline, he said.

The Reserve Bank continues to project a turnaround in whole milk powder from September this year. WMP rose 5.5% to US$1974 a tonne at the latest GlobalDairyTrade auction, and the central bank projects that rising to US$3200/t by 2018.

Governor Graeme Wheeler said European milk supply continued to complicate the situation with about a fifth of its exports diverted from Russia – which is facing global sanctions – into the world market.

Fonterra Co-operative Group yesterday blamed European production for depressing global dairy prices when it cut its forecast payout to farmers to just $3.90/kg of milk solids.

However, the Reserve Bank was less pessimistic about the effect of an El Nino weather pattern affecting agricultural production in its March monetary policy statement, saying the risk of dry conditions had reduced. It had cited the weather pattern as a specific risk to the economy in its December report. 

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