Farmers right to be wary of borrowing

ANDREA FOX
Last updated 14:53 20/11/2013

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The prospect of softer international commodity prices and rising interest rates next year means farmers are wise to be cautious about borrowing, says a Westpac senior economist.

Reviewing the Reserve Bank's warning last week about the continuing high level of debt in the agricultural sector, Anne Boniface said  many farmers are prioritising debt reduction after this year's drought, with borrowers wary of ongoing volatility in commodity prices.

''That seems sensible given our own forecasts of softer commodity prices and higher interest rates next year. So long as credit growth remains modest, the RBNZ (Reserve Bank) is likely to be happy keeping a watching brief.

''But should it ramp up significantly, the bank may feel compelled to enter the fray,'' said Boniface in Westpac's latest Agri update.

High international dairy prices stabilised in last night's Global Dairy Trade auction with the headline trade-weighted index nudging 0.1 per cent higher after falls in the last two online auctions. Wholemilk prices were flat while skim milk powder prices continued north.

Westpac said this was a solid result given continuing strong New Zealand milk production. More than a third of this season's production has now been processed, but milk flow continues well ahead of last year. In the four months to September production was up 7.2 per cent on the previous season.

Westpac said it remained comfortable with its $8.30 forecast for the 2013-2014 season. But it continued to forecast lower dairy prices next year under the weight of increased global production.

Boniface said the Reserve Bank's concern about agriculture debt - most of it in the dairy industry - is that it creates a risk for the wider financial system. 

In the past decade, growth in agricultural debt has outpaced growth in the sector's income, driven by a wave of dairy conversions and strong rises in land prices. There continued to be ''a niggling unease'' about the sector's debt, and the possibility higher incomes this season might be capitalised into land values, she said.

The central bank in its Financial Stability Report last week warned farmers and banks not to expect the current exceptionally high dairy prices to last forever.

The report said loans by registered banks to dairy farmers this year totalled $32.37 billion. Total agriculture on-farm loans were $49.2b and agriculture as a whole owes banks $50.5b.

Boniface said the value of turnover in rural property markets had steadily trended higher this year.

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The value of lending to the agriculture sector had also stepped up in the past two years, she said.

But at a little over 4 per cent on an annual basis, compared to the 15 per cent plus growth seen in the mid-2000s, this level was hardly excessive, she said.

- Fairfax Media

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