New Zealand's rural lending, which more than doubled to an all-time high of $50.6 billion in the past decade on dairy farm expansion, may slow as farmers use record milk payouts to reduce debt, spurred on by rising interest rates.
In the past 10 years to June 30, 2013, agricultural debt has risen mostly due to the dairy sector where lending has almost tripled to $32.4 billion. The surge in lending to the dairy industry far exceeds the $1.4 billion debt owed by sheep farmers and $1.2 billion accrued by beef cattle farmers, according to Reserve Bank figures.
Dairy sector lending has soared as farmers have invested in converting land to dairy farming to take advantage of high milk prices and the associated strong growth in farm land prices, the central bank said in its last Financial Stability report in November. Indebted dairy farmers will be weighing up using high dairy payouts to pay down debt or increase farm investment in anticipation of a positive outlook, it said. Since then, the bank has begun to raise interest rates, hiking the benchmark twice in as many months, and milk prices have weakened in response to increased production.
"With historically low interest rates and very good returns, it's been a good time to be repaying debt in most dairy farming businesses," said Brent Love, an agricultural specialist at KPMG in Timaru. "Rising interest rates certainly make debt servicing in those dairy businesses more expensive. Hopefully farmers have heeded the caution of the Reserve Bank and positioned themselves for higher interest costs."
Reserve Bank governor Graeme Wheeler is scheduled to speak to the DairyNZ Farmers' Forum in Hamilton tomorrow on the significance of dairy to the New Zealand economy. The bank will release its latest six-monthly Financial Stability report next Wednesday.
In Fonterra Cooperative Group's last GlobalDairyTrade auction in April, dairy product prices extended their slide to a 14-month low, paced by whole milk powder, raising speculation the company's forecast record milk payout may not be sustainable.
In February, Fonterra raised its forecast payout to farmers to a record $8.65 per kilogram of milk solids for the 2013/14 season. Since then, the GDT price index has dropped almost 20 percent. Nick Tuffley, chief economist at ASB, said he now expects the milk payout this season to recede back to $8.50 per kgMS. Fonterra holds its next GlobalDairyTrade auction tomorrow morning.
Bank of New Zealand is noticing a slowdown in agri-sector lending as dairy farmers deleverage, incoming chief executive Anthony Healy said last month.
"When you get bigger dairy cheque payouts, farmers deleverage, they pay down debt and so the system credit starts to come back as well," Healy said.
Total agricultural lending rose 5.5 percent in the year through June 2013, down from 15 percent growth in 2009, according to Reserve Bank figures.
"The agri lending market was flat to March, but it is expected to grow in June when many dairy land sales settle," said Stefan Herrick, a spokesman for ANZ Bank New Zealand, which has the biggest share of the rural lending market at 32.9 percent.
"There has been an active land market and increasing land prices," he said. "Farm capital expenditure is at a high level due to investments in environmental compliance, and increasing productivity. Land purchase and capex has been offset by high profit levels, leading to debt reduction."
This article is tagged with the following keywords. Find out more about MyNBR Tags
- Right of reply: Consistency underlies ideal constitution
- Fire sale recommended for Pumpkin Patch
- MARKET CLOSE: NZ shares dragged lower by SkyCity; Orion, Air NZ rise
- Carry on: Singapore gets 10,000th Airbus, China Southern's B787-9 order and more
- Seeka predicts increased annual profit in 2016, reduces fruit loss
Most listened to
- Business Week in Review with Grant Walker & Andrew Patterson
- First Retail Group's Chris Wilkinson on Pumpkin Patch's worsening situation
- SkyCity ‘strangling the golden goose’
- The Prime Minister says National will "put up a good showing if we can" in the Roskill by-election
- Dick Quax challenges Phil Goff on housing market. He explains what he wants the mayor-elect to do