One in four dairy farmers in negative cashflow this season - Wheeler

Another year of sagging dairy prices will be a concern for New Zealand's economy, particularly when 25 percent of farmers are carrying debts above 65 percent of the value of their assets and  trading in negative equity.

Reserve Bank governor Graeme Wheeler, expanding on the bank's six monthly financial stability report, says "another year of low prices would be a worry for the economy and farmers in terms of their debt capacity.

Prices for whole milk powder dropped an average 1.8 percent to $US2386 a tonne in last week's GlobalDairyTrade auction, extending its decline over the past five auctions to 27 percent.

Those low prices, caused in part by the Chinese build-up of inventories during 2013 and falling cereal prices allowing less efficient farmers to retain some margin, are seen as one of three key risks to New Zealand's financial stability if they were to linger.

The central bank says there is significant cross-over between farms estimated to have negative cash flows and those with high loan-to-value ratios above 65 percent.

About 25 percent of farmers, who account for almost 32 percent of the sector's $34 billion in debt, are estimated to have negative cash flows as milk prices hang near five-year lows and the outlook remains subdued. The central bank estimates about 11 percent of debt is held by farms with high loan-to-value ratios of above 65 percent.

Wheeler told Parliament's finance and expenditure select committee the bank estimates prices will return over the medium term to equilibrium of between $US3200 and $US3800 per tonne, though market pricing only suggests it will rise to about $US2700 a tonne by the end of the year.

He says if the dairy price remains at low levels for a considerable period,  negative cash flow problems will intensify and dairy farm prices will fall, compounding the situation.

The bank said private lenders have a "largely positive view" on the long-term outlook for the dairy sector and have been easing credit conditions for working capital.

Deputy governor Grant Spencer told politicians lending on farms had been fairly stable in recent years, and still accounted for the bulk of the sector's debt. Farmers had increased borrowing to fund short-term working capital.

Spencer says farms experiencing negative cash flow in the current season are able to source funding from last season's deferred payout, short-term bank loans, and cutting back on investment intentions, though that can't last forever and the more highly geared farms will find themselves struggling to service their loans.

"From our perspective, there is some degree of optimism because farmers hate to walk away from the land," Spencer says. "They they won't do it lightly and will go to some extraordinary lengths to continue to service the mortgage."

(BusinessDesk)