Farmers to 'tighten their belts'

Credit crunch hits dairy industry

The time of milk and honey could be over for the south as the global credit crunch brings lower commodity prices and a warning to banks to curb their enthusiasm for the dairy sector.

The Reserve Bank's financial stability report, released last week, showed dairy commodities have fallen more than a third in world price terms from their peak a year ago, bringing warnings to banks to watch their lending.

"The Reserve Bank considers that agricultural lending has become a riskier component of bank balance sheets, that should be managed carefully," the report says.

National Bank chief economist Cameron Bagrie said the turmoil in the international markets was hitting dairying particularly hard.

He expected payouts to "have a five in front of it" rather than their current $6.60 mark.

"Banks will curb their lending, you're in a completely different economic environment at the moment, there's a lot of uncertainty around the globe and you're seeing a lot of pressure on commodity prices and dairy prices are leading the charge," he said.

"For the typical dairy farmer who has been in it for donkey's years a $5 payout is still money for jam. For someone who has jumped in late in the economic cycle there's going to be a bit of stress and you're going to see the cheque book put away."

Farmers would have to "tighten their belts" during the next two years, but the long-term prognosis for the industry was still good, Mr Bagrie said.

Federated Farmers Southern Region dairy chairman Rod Pemberton agreed with the prediction.

"There's probably an element of truth, there's probably a lot of truth to it actually but the long term future of agriculture has to be good," he said.

"Prices have probably got overheated I suppose ... but because the world is falling apart doesn't mean that production has risen significantly so we still have the food shortages and all those associated things so the long-term look for dairying has to be good."

Despite the immediate forecast, specialist rural lender Rabobank would still be processing dairy loans, although it would be looking carefully at the medium to long-term basis of each application.

"We're still very much open for business," executive manager Hamish Midgley said.

"Rabobank is an AAA-rated bank and we're certainly not having any trouble raising liquidity for lending but our message would be the same as it's always been: we would look very closely at the medium to long term outlook for that business proposition ... rather than taking a short-term approach."

Dairy conversions scheduled to start milking next year would continue to pump money into the Southland economy but Rabobank encouraged farmers to count their pennies, Mr Midgley said.

"The message we're giving to farmers is certainly to curb any unnecessary expenditure so as they can create the margin between expenditure and revenue and that would see them through the periods of varying low payouts."

- © Fairfax NZ News