Strong growth in bank deposits from the agriculture sector over the past year suggests there's a buffer in place to assist with falling dairy farm incomes, ASB senior economist Chris Tennent-Brown says.
Tennent-Brown notes bank deposits from the agriculture sector rose nearly 20%, or almost $1.5 billion, in the year to June to just under $7.4 billion.
"(This) suggests both less need for debt financing, and in aggregate at least, there is a good buffer in the agriculture sector to help with lower incomes," says Tennent-Brown.
"Dairy farmers only get a proportion of the overall final milk price throughout the season, with the rest coming as deferred payments after the season has finished. Deferred payments for the bumper season just gone will be paid over August to October. These payments are worth roughly $3 billion. Accordingly, we will monitor for further growth in agriculture sector deposits over the coming months, and potentially some draw-down later on as the lower milk price for this season reduces incomes," Tennent-Brown says.
Fonterra last week reduced its 2014-15 forecast Farmgate Milk Price by $1 to $6 per kilogramme of milk solids, and announced an estimated dividend range of 20 cents to 25 cents per share. This total forecast payout of up to $6.25 compares to $8.50, comprising $8.40 per kgMS and a dividend forecast of 10c, for the 2013-14 season.
In May the Reserve Bank said nearly 70% of the $32 billion worth of dairy farm debt was on floating mortgage rates, meaning rising interest rates are likely to increase financial stress if incomes fall, which will happen if the payout drops.
The Reserve Bank has increased the Official Cash Rate four times so far this year, by a total of 100 basis points, to 3.50% - sending floating mortgage rates higher - and is expected to continue increases through 2015.
The Reserve Bank's latest monthly sector credit figures show agriculture sector debt rose at an annualised rate of 3.7% in June to $52.9 billion.
"The Reserve Bank has noted the fall in commodity prices and the impact this will have on agriculture sector incomes. Accordingly, the modest credit growth and strong deposit growth in the agriculture sector will be welcomed," Tennent-Brown says.
The 3.7% rural debt growth in June was up from 3.1% year-on-year in May, and 2.3% in both March and April.
That March to April growth rate was the weakest annual growth rate since May 2012. This year’s dip in dairy prices and strong NZ dollar may be tempering expectations of future income streams and in turn appetite for taking on debt for expansion," says Tennent-Brown.