Friday, March 29, 2024

Negative cashflow for most dairy farmers: RBNZ

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The Reserve Bank of New Zealand anticipates most dairy farms will remain viable over the medium term, despite escalated debt levels and low global milk prices placing dairy farmers under significant cashflow pressure. The Reserve Bank (RBNZ) released an updated assessment of dairy sector vulnerabilities on Tuesday, expressing financial stability concerns in the current market environment.
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RBNZ predicts about 80% of farmers, representing almost 90% of sectoral debt, are expected to have negative cashflow in 2015-16.

Dairy sector debt increased from $11.3 billion to $29b between 2003 and 2009 because of rapid increases in land prices, an increase in dairy conversions and significant onfarm investment.

The expansion in debt has left highly-leveraged farmers exposed since milk prices fell in 2009, and again more sharply in 2014.

While debt accumulation has slowed since 2009, total dairy debt at June 2015 had reached $37.9b.

“Global developments in the dairy sector over the past two years has created the cause for concern,” the RBNZ report said.

“Between February 2014 and August 2015, global dairy prices fell by more than 65%, due to increased global supply, sanctions on Russian imports and reduced Chinese demand.”

The onfarm effect of the falling dairy prices has manifested in cashflow pressures, and a rising break-even payout.

The cashflow shortfall for the average dairy farmer is estimated to be more than $1 per kilogram of milksolids (MS), while the break-even payout is $5.28 – well above Fonterra’s current forecasted $4.60kg MS farmgate milk price.

RBNZ has observed that farmers have reacted to the lower dairy prices by reducing working expenses, which for the average dairy farmer are expected to fall 8% in 2015-16 from 2014-15.

Farmers are, however, less able to control interest expenses with only a small drop from $1.34/kg MS in 2014-15 to $1.28/kg MS in 2015-16.

RBNZ acknowledges and supports the medium rather than short-term approach the banks are using to assess farm sustainability.

“A significant tightening in the lending standards could amplify the pressures facing the sector, create undesirable fire-sale dynamics in the market for dairy farm land, and increase loan losses for the banking system,” the report said.

While the overall finding is somewhat reassuring, with confidence expressed in the banks’ ability to manage their losses, this may be challenged if confidence in the longer-term milk price outlook deteriorates from its current positive position.

“Downward price movements could be amplified by reduced liquidity in the farm market, if demand to purchase farms falls alongside the increased risk of stressed sales.”

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