Indebted farmers will be helped by about $1.50kg/milksolids (MS) in deferred payment from the big 2014 season but deferred payments next season will be much lower.
Dairy farm debt was one of the three major risks to the NZ economy identified by the Reserve Bank, alongside the high Auckland house prices and very low international interest rates encouraging investors into a range of riskier asset classes, which could be at risk when interest rates return to “normal’’ levels.
Some recovery of milk prices is expected next season but the timing and extent of this was uncertain, the bank said. The extent of recovery in Chinese milk demand, following the large build-up in inventories in 2013, will be an important influence on world prices.
International milk prices have fallen more than 50% from the early 2014 peak. NZ’s vulnerability would be exacerbated if this situation leads to a marked fall in farmland prices, the bank said, noting that dairy farm prices had actually risen by about 10% over the past year.
Demand was being supported by low interest rates and an expectation the long-term outlook for dairy prices would be supported by increasing Chinese demand.
Trading banks had a positive view on the outlook but history showed as recently as 2008-09 and 2011-12 that declining farm incomes were typically accompanied by sharp falls in farm values, the report said.
Debt had risen at a lower level in recent years, in comparison to income and production, than it had between 2003 and 2009, when borrowings rose from $11.3 billion to $29b.
Debt per kilogram of milksolids rose from $9.50 in 2003 to $20.80 in 2009, and the level had since steadied to $18.90 at the end of the 2014 season.
The report said the most indebted farms – about 10% of the total – had average debt of more than $25kg/MS, compared to an average of less than $10kg/MS for the least indebted 20% of farms. About 24% of dairy farm debt was owed by farmers with debt above $30kg/MS.
With milk prices at five-year lows dairy farmers were expected to face difficult conditions for two consecutive seasons. Even if milk prices recover “somewhat’’ during 2015-16 effective dairy income would remain at about current low levels because of the much lower deferred payments.
The report also referred to weak profitability because of relatively high working expenses. The least profitable 10% of farms had average working expenses about $2kg/MS higher than the most profitable 10% of farms. Farmers reliant on imported feed were liable to be particularly susceptible to low milk prices.
