Some dairy farms holding too much debt will be forced to sell some or all of their operations, the Reserve Bank warned in its latest Financial Stability Report reports The ODT. Debt levels within the agricultural sector had risen strongly in recent years, with a doubling of debt levels since 2004, the six-monthly report published today said.  “Very strong rates of debt accumulation within the dairy sector have been a major driver of recent agricultural credit growth, with lending to the dairy sector now accounting for almost two-thirds of total agricultural lending outstanding.”

The distribution of that debt was heavily skewed, with many farms holding relatively small amounts of debt, while a smaller proportion were “very heavily” indebted, the report said.  Many of the highly indebted farms were bought in recent years, perhaps in the expectation high dairy prices at the time would continue for some time.

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Eighteen months ago, independent analyst, Colin Riden, of Manawatu, described as “economically perverse” some of the decisions being made by farmers and the agricultural industry. In a series of articles in New Zealand Farmers Weekly he deconstructed some of the sacred pillars of Kiwi farming, including Fonterra, the value of research and even the disconnect between farming and the rest of society. Riden’s concerns included swollen debt levels from Fonterra down to farmers. They drove him to pay a visit to Treasury almost two years ago to express his concerns. “We had a reasonable reception until we moved further up the chain and then it seemed to be dismissed at that time.”

Today, Riden could be forgiven for dishing out a big “I told you so” as Fonterra shares, farm-gate returns and all accompanying assets take a slide in value, while some farmers grapple with bloated debt levels. His concerns revolve around the 40% of dairy farms wearing reasonable to substantial debt, although he is also sceptical even about the future of those farms carrying as little as $3/kgMS.

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