Most dairy farms are expected to be profitable in the 2017-18 season, the Reserve Bank’s latest Financial Stability Report says.
By: Sally Rae
Source: Otago Daily Times
As a result, the performance of banks’ dairy loan portfolios had improved. Banks were reporting fewer loans that needed to be closely monitored and had started to reduce their provisions against losses on their dairy loans.
Higher dairy prices had continued to support farm incomes after prices recovered in late 2016.
Non-performing loans had fallen by $100 million since May and the share of banks’ dairy loans that were non-performing was now 1.6%, down from 1.9% at the end of 2016. The recent peak in non-performing loans was much lower than the peak that followed the sharp decline in dairy prices in 2008.
Although farm incomes fell by more in 2015-16 than in 2008-09, several factors helped to limit stress in the sector more recently.
The 2008-09 downturn followed a number of years of rapid credit growth to the dairy sector to fund investment and a shift towards more intensive and costly production models. Between 2005 and 2008, debt in the dairy sector almost doubled.
In contrast, the recent downturn came after a period in which debt had been increasing by less than incomes. Farm costs were also lower at the outset, and farms subsequently reduced costs further, the report said.
A resilient market for dairy land had also helped. Farm prices and sales activity fell by less and had recovered more quickly than in the previous downturn, when the broader effects of the global financial crisis were being felt.
The smaller decline in farm prices in 2015-16 left farmers in a better position to borrow against their farms to manage their cash flows. Banks provided working capital loans to farms that were expected to be viable in the long term, and foreclosures were modest.
During the recent downturn, bank lending to the dairy sector increased by $5 billion, or 15%, mainly for working capital purposes. Farms also borrowed almost $400 million through Fonterra Co-operative Support Loans.
There were signs that some dairy farms were starting to use higher incomes to reduce their level of indebtedness. Bank lending to the dairy sector grew by just 0.6% in the year to September 2017.
In addition, the share of dairy lending on interest-only terms had decreased since late 2016 as banks and farms had increasingly focused on reducing debt.
Those developments were encouraging. Farms were likely to reduce debt if current levels of dairy prices were maintained, but some farms also needed to catch up on deferred maintenance and capital expenditure, which would slow the repayment of debt.
In late September, Fonterra forecast a further increase in the 2017-18 season payout to $6.75. However, lower prices at recent dairy auctions suggested downside risk to that forecast, the report said.
Global dairy prices have fallen about 10% since September amid more global milk supply and potential changes to the EU intervention scheme.
Current dairy product pricing presented clear downside risk to Fonterra’s forecast and BNZ economists wondered if their current forecast of $6.30 might ultimately prove a bit too high once the season was all done, the bank’s latest Rural Wrap said.
It depended on where global prices tracked from here. New Zealand’s current dry weather was potentially important, as well as the trajectory of the New Zealand dollar, which had been offering some support with its somewhat lower track over recent months.