Reserve Bank cautious on dairy industry recovery

By Nick Clark

The financial system is still sound but housing, dairy, and bank funding costs remain key risks, according to the Reserve Bank’s latest six-monthly Financial Stability Report.

Regarding dairy, the Reserve Bank observed that low dairy prices in the 2014/15 and 2015/16 seasons caused the average dairy farm to make losses.  Commodity prices have improved over recent months and this has prompted Fonterra and other dairy companies to increase their forecast milk prices which, if met, would return the average dairy farm to profitability.

However, the Reserve Bank warns that parts of the dairy sector remain under significant pressure and some farms will struggle to be profitable, especially the 20 percent of dairy farms that account for 50 percent of dairy debt.

The good news is that fears around a ‘severe’ scenario, where many farms are potentially put out of business, have receded.  However, high debt levels leave the sector vulnerable to further weakness in dairy prices.

Watch-list loans and non-performing loans, although both relatively low at present, are likely to increase even as farm incomes improve.  So some farmers are likely to remain under pressure from their banks.

With this in mind, Federated Farmers will be continuing with its Banking Surveys.  The November survey is currently in the field.  Federated Farmers members will have received an email on Wednesday inviting them to take the survey.  Please complete it and tell us how things are going.

The growth in agricultural debt is continuing to slow, according to the Reserve Bank’s October Sector Credit Statistics.  Agricultural debt was $60.9 billion, up $32 million on September.  The annual rate of growth is down to 3.8 percent (from 9.2 percent a year ago).  

In the Financial Stability Report the Reserve Bank said that while lending for farm working capital has continued to grow, lending for capital investment (including farm purchases) has been falling.

Business confidence slipped in November but remains positive and indicative of solid growth to come according to ANZ’s monthly Business Outlook Survey.  

Overall, a net 20.5 percent of respondents expect the economy to improve over the next 12 months, down 4 points on October, while a net 37.6 percent expect their own activity to increase, down 1 point.  The latter is a better indicator of growth prospects and it remains elevated.

Agriculture for a change was more upbeat than businesses generally, with a net 27.2 percent expecting the economy to improve, up 20 points, and a net 32.3 percent expecting their own activity to increase, up 8 points.  Improved dairy prices will have been a big factor.

The terms of trade slipped 1.8 percent in the September quarter, according to Statistics NZ’s quarterly Overseas Trade Indexes.  

Export goods prices fell by 2.8 percent in the quarter, with falls for dairy (down 3.7 percent), meat (down 3.1 percent), and forestry (down 4.1 percent).  Goods import prices were down a more modest 1.0 percent.

The ‘terms-of-trade’ is a measure of the purchasing power of New Zealand’s exports abroad.  It has fallen in four of the last five quarters but with dairy prices recovering more recently the terms of trade should start improving again.