Dairy sector risk to NZ financial system ‘has gone down’ – Reserve Bank


Dairy products now pose less risk to New Zealand’s financial system, according to the Reserve Bank. Photo / Provided

Risks to New Zealand’s financial system from the once highly indebted dairy sector have “significantly diminished” in recent years, the Reserve Bank said in its latest financial stability report.

Fonterra’s latest forecast for the farm gate milk price for the 2021/22 season of $9.60 per kg of milk solids would represent a record level of payment, although this may be slightly offset in terms of farm income by lower production volumes, in part due to drier weather conditions, the bank noted.

The current strength in dairy prices could continue into next season, with limited prospects for global milk supply growth in the near term, he said.

“Overall, the risks to the financial system of the dairy sector have decreased significantly in recent years.”

The dairy sector continued to take advantage of the currently favorable conditions and the low interest rate environment to consolidate and reduce its indebtedness.

On average, dairy producers have paid off about $3 in bank debt per kg of milk solids in recent years.

“Total dairy sector debt has fallen by around 12% ($5 billion) since its all-time high in 2018, lowering debt-servicing costs and meaning farmers will be better placed to weather any potential future decline in dairy prices,” the Reserve Bank said. mentioned.

Banks continue to diversify their agricultural loan portfolios from dairy to other industries, particularly horticulture.

The Reserve Bank said that if input prices rise, higher food prices should be overall beneficial for New Zealand’s agricultural sectors.

“With a predominance of pasture-based production, New Zealand dairy, sheep and cattle farmers are relatively less exposed than their international counterparts to disruptions in grain markets resulting from the Russian invasion of Ukraine.”

In the near term, most agricultural industries are facing similar pressures as other businesses, including a tight labor market, input cost inflation, and production disruptions from the Omicron outbreak. .

Labor shortages are limiting production, including limiting the harvest of fruit and causing delays for meat processors.

However, most of these factors are expected to be temporary, he said.

“In a broader context of high commodity prices, the continued diversification of banks’ agricultural portfolios is positive for the soundness of the financial system.”

Activity in the rural land market has been strong over the past year, supported by the low interest rate environment and an increase in listings as owners reassess their holdings in the face of changing land regulations. land use and rising carbon prices.

Converting less productive land used for sheep and cattle farming to permanent or production forestry offers attractive financial returns at the current price of carbon, as afforestation is a relatively cost-effective way for New Zealand to reduce its net emissions with current technologies.

The Reserve Bank noted that the government has recently consulted on potential changes to the emissions trading system that would ban new permanent exotic forestry.

On the sidelines, the Reserve Bank said it could further increase the price of carbon and incentivize more land conversion to production forestry.

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Don F. Davis