Kiwi farmers as a whole are the most debt-laden in the world and average dairy farm debt has tripled in the past decade.
Fears are now being expressed that trend could continue based on promised record high returns.
As long as five years ago banking expert David Tripe used strong words to criticise bank lending practices: “Where it’s been really criminal is in the farming sector ... they’ve had some unrealistic views of the riskiness of some of the business they’ve engaged in.”
“Banks have no desire for the purchasers they are financing to drive hard/efficient bargains on land prices. They'd prefer to loan you a few extra 100k than to facilitate a sale that might set a lower benchmark which would erode the value of the other properties they are financing,” on line comment.
The Reserve Bank says high levels of debt in the whole ag sector, but especially dairy, is one of the risks to the whole country’s financial stability.
Even when we see comments like this, it is more concerning to be told that it is not unknown for dairy farmers to have debt levels of over 100% of gross income [reportedly up to 114%]. . . which of course means they have to borrow just to pay the interest.
Debts like this could never be sustainable so why were they allowed accrue?
In its latest twice yearly Financial Stability Report, the central bank says while the financial system is sound, there are risks, one of which is the indebtedness of the dairy sector.
It says while the sector is enjoying record export prices, the level of indebtedness makes it vulnerable to a fall in commodity prices or an increase in interest rates.
The Reserve Bank says given the record forecast milk price payout, dairy farmers may take the opportunity to reduce their debt burden but there is a risk that farmers may make borrowing decisions based on the assumption of consistently high commodity prices in the future.
It is concerned this could push up prices for farm land and encourage further borrowing, which could leave parts of the sector even further exposed to a downturn in earnings.
Debt levels for a dairy farm sit at about $18-$19/kg compared to $21-$22 three years ago indicating farmers have been able to pay down debt.
It is generally accepted total operating costs including debt servicing are around $6.40 so payouts of $8.30 aren’t going to cause too many headaches but predictions are they are heading south in the future.
DairyNZ chief executive Tim Mackle said the latest predictions were farmers were heading for operating expenses towards $5/kg with farm working expenses at about $4.40/kg.
"But with a higher milk price and farm values increasing there is a risk that it might bump up again. The risk is debt levels might increase again."
Total borrowings have increased in Canterbury as dairying expands and total milk production continues to increase. Canterbury now accounts for about 19 per cent or $6 billion of the $32b sector debt.
Mackle said farmers were looking at an average debt servicing level of about $1.40/kg.
"The average debt is going to be $1.40/kg so you have to add that on top of the operating costs. Some farmers will be looking at $2.50/kg and there is quite a range in that $1.40/kg to no debt at all to three times or more in that debt."