New Zealand's Reserve Bank warns of escalating debts among dairy farmers
The Reserve Bank of New Zealand said in its six-monthly financial stability report that weak dairy prices are putting a lot of pressure on loans made to dairy farmers.
RBNZ warns that the danger of a substantial rise in bad loans in the dairy sector has increased over the past two years due to high debt levels and falling milk prices.
The Reserve Bank has asked the country’s largest dairy lenders to undertake stress tests of their dairy portfolios and the results are expected before the end of the year.
“We think dairy debt has increased by about NZ$3bn (€1.85bn) over the past 12 months and about half the dairy farmers are experiencing the second consecutive season of negative cash flows,” RBNZ governor Graeme Wheeler told Reuters reporters.
Having risen steadily since 2008 to record highs in 2013, global dairy prices sharply dropped due to a slowing economy in China, New Zealand’s top export market, and a global oversupply of milk products.
Prices bounced back slightly in August as slowing supply pushed up prices, offering hope the dairy market was stabilising, but have declined again in two recent global dairy auctions.
Farmers in New Zealand have far higher debt levels than Irish farmers. Farm debt-equity ratio in New Zealand is at c.40% versus closer to 5% in Ireland.
One study by Teagasc economist Dr Fiona Thorne found that the average debt level on Irish farms is €24,000, which is about half of the European average.
That Teagasc study, sponsored by Bank of Ireland, was published earlier this year to help farmers make key post-quota decisions in relation to dairy expansion.
The report also showed that debt on tillage and dairy farms is significantly higher than on livestock farms. The average debt in 2013 on Irish farms was €24,000, but on dairy farms with debt it was €94,000.
Taking all dairy farms into account, those with and without debt, the average debt is €62,000.
