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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Farmers should brace for their bankers toughening up on lending reports Country-wide. They should brace for a sharp fall in land prices, too, the Reserve Bank is urging. Dairy farms seem most at risk, the central bank says in a report which warns that sharp rises in agricultural debt levels in recent years “may not be sustainable…” The latest six-monthly Financial Stability Report advises bankers to make adequate provisions and maintain enough capital to absorb unexpected losses. The agricultural and commercial property sectors “warrant particular attention”, it says.

Essentially, the risks in agricultural lending have become more pronounced as lower commodity prices and the weakening world economy reduce export receipts. BNZ chief economist Tony Alexander in late April similarly spotlighted agriculture as the sector most likely to find it harder to get credit during the global credit squeeze. He was pleased to see the Reserve Bank echo his concerns in its report. The substantial debt growth in the agricultural sector over the past few years had seemed acceptable, in most quarters, as land prices soared.

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