But Federated Farmers dairy chairman Andrew Hoggard says Wheeler used outdated figures when he warned the dairy sector was still a financial risk to the economy and banks should monitor it closely.
“The uncertain outlook for dairy prices and the rising proportion of highly indebted farms means there remains a risk that non-performing loans could increase in coming seasons.
“The sector will remain vulnerable until the proportion of farms with unsustainable debt levels is reduced. This may take some time as these farms need to build equity buffers with profits or exit the sector.
“The most indebted farms may find this more challenging, particularly if interest rates rise, as they typically have larger costs due to higher interest expenses.
“As a result, banks should continue to closely monitor their exposures to the dairy sector. If farms become stressed, it should be quickly recognised in banks’ risk models and potential losses should be adequately provisioned against,” Wheeler said.
The debt carried by the average owner-occupier dairy farm increased by $100,000 during the 2015-16 season (when the milk price was only $4/kg).
The share of vulnerable farms had increased, with 44% having debt greater than $30/kg of production, up from 27% a year earlier, Wheeler said in the bank’s latest Financial Stability Report.
Hoggard said the 2015-16 figures did not reflect the 50% increase in milk payout in 2016-17.
“It’s up to farmers to use the better times to repay debt and get down to sensible levels.
“There are plenty of challenges and requirements in our industry so I hope increased payouts don’t lead to more borrowing.
“We will see after two better seasons how good are people’s memories of the bad times.”
Hoggard thought paying down the overdraft and resuming repayments of loan principal should be priorities.
The report said dairy farm prices had fallen though there had been relatively few forced sales.
Therefore, the combination of low milk prices, higher debt and lower land prices had reduced equity levels across the industry.
“Equity is an important buffer on which farms can draw during periods of losses and also insulates the banking system from stress in the sector.”
More than a quarter of dairy debt was to farms with loan-to-value ratios in excess of 80%.
In contrast, those farms with a LVR of less than 60% had fallen from 60% of the industry to under 40%.
“Around a quarter of dairy sector lending is to farms that are being closely monitored by banks,” Wheeler said.
DairyNZ senior economist Matthew Newman said the highly indebted farms did not necessarily have higher costs but they did have a higher break-even price because of higher debt repayments.
“Now, with better payouts those farms should be encouraged to or decide to repay debt as a priority.”
Newman did not think higher interest rates were a present threat.
“The industry has been fortunate that the low-price seasons and working capital requirements have coincided with record low interest rates.”
However, the recent history of the dairy industry showed better milk prices hadn’t reversed the trend of rising indebtedness.
ANZ Bank rural economist Con Williams said debt repayment was accelerating across the industry.
He didn’t expect a return to dairy farming expansion with better milk prices because of environmental constraints and a lack of suitable land.
“Higher cash returns will favour debt repayment over other expenditure as heavily indebted farmers get back to sustainability,” he said.
More: Read the report at www.rbnz.govt.nz
