Reserve Bank- some dairy farms to go

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. But dairy prices dropped sharply with the onset of the global financial crisis, while the strength of the New Zealand dollar had lowered local currency commodity prices further. The report noted there had been some recovery in wholesale dairy prices. Prices at Fonterra's online dairy auctions for whole milk power is up 88% over four months to $US3437 a tonne, but still well down on the record levels of nearly $US5000/tonne reached on spot markets in 2007. The improving market conditions enabled Fonterra, on Monday, to lift its forecast payout to farmers to $6.05 per kilogram of milksolids, from the $5.10 announced in September.