A Reserve Bank bulletin published yesterday noted five banks that are the largest dairy sector lenders participated in a stress test run by the Reserve Bank in late 2015. Two scenarios were tested, with scenario one assuming that the dairy payout recovers to $5.25 per kilogram of milksolids by the 2017/18 season and a fall in dairy land prices of 20 percent. Under the second scenario, the dairy payout was assumed to fall to $3 in 2015/16 and remain below $5 until the 2019/20 season with a fall in land prices of 40 percent.
Head of Macro Financial Bernard Hodgetts said “bank lending to the dairy sector stands at around $38 billion, which is approximately 10% of the banking system’s total lending. We would expect losses of the order seen in the stress scenarios to be absorbed largely through lower bank earnings rather than through an erosion of bank capital.”
ASB responded to the findings by noting they are “consistent with banks continuing to support dairy [farmers] facing short-term cash flow difficulties.”
Political reaction to the stress test findings continued to reveal differences between the Government and the Opposition in supporting suffering dairy farmers.
Labour Party leader Andrew Little interpreted the result as an indication that banks will have no justification to force farmers off their land, and enable farms to be sold offshore.
Little also suggested the time was now right for the Government to show some more hands on leadership. “The Government should call a summit of banks, ministers, Federated Farmers and Fonterra to develop solutions to keep good, efficient farms in business and productive land in New Zealand’s hands”.
Prime Minister John Key responded by repeating the Reserve Bank finding that “banks would be very strong and they would be in a position to continue lending to their existing borrowers—in other words, finance those farmers through a difficult downturn”.
Key again rejected direct intervention. “We cannot control the exchange rate and we cannot control commodity prices and we cannot control the weather. We can control free-trade agreements, planning laws, health and safety, Resource Management Act reform”.
