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Financial Casualties Predicted in Dairy Sector

12 November 2009

NEW ZEALAND - The Reserve Bank is expecting to see more financial casualties in the dairy sector, where there is a high level of debt.

The bank's latest financial stability report notes that agricultural debt has doubled in the past five years, which has been driven mostly by debt accumulation within the dairy sector.

It says while many farms owe relatively small amounts, a smaller number, especially those bought in recent years, are very heavily indebted.

The report says some are now suffering significant financial stress, and predicts some of those farms will be forced to sell part or all of their operations.

The financial stability report was compiled before this week's Fonterra announcement, lifting its forecast payout from $5.10 to $6.05 a kilogram of milk solids.

Reserve Bank Governor Alan Bollard told Radio NZ that the change in payout will ease some of the lending pressure on the dairy sector.

Farmers have indicated they will be using the associated lift in in their advance payments to reduce debt.

The bank's deputy governor, Grant Spencer, says trading banks will also have to change their approach to the way they manage risk in their rural lending.

The changes will require a steadier approach to holding risk capital, as too little was held during boom time, and less needs to be held during downturns, he says.

Mr Spencer says banks will have to have those changes in place by the middle of next year.

Further Reading

- You can view the full report by clicking here.


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