Commercial banks’ non-performing loans to the dairy sector have declined, the central bank said in its financial stability report.
Global dairy prices have declined in recent months, but remain well above their mid-2016 levels, the bank noted.
Banks have supported farms through the recent dairy price downturn, which has helped to limit loan defaults, it said.
“It is appropriate for banks to continue working with the sector to use improved cash flow positions to reduce debt levels in the sector over time,” it said.
Fonterra has a milk price forecast of $6.75/kg for the current season, up from $6.12/kg in 2016/7.
Private sector economists expect to see a revision down to around $6.25 to $6.50/kg when the co-operative reviews its milk price forecast next month.
At those levels, farmers would still be ahead of Dairy NZ’s latest estimate of break-even of around $5.20 to $5.25/kg.
Farm debt ballooned when prices slumped to $3.90/kg in 2014/15 and to $4.40 kg in 2015/16.
The Reserve Bank said that although dairy prices have eased recently, the price of whole milk powder is still around 35 per cent higher than in mid-2016 and butter prices have almost doubled.