NZ banks warned on dairy

New Zealand Finance Minister Bill English has cautioned banks to be careful before pushing heavily indebted dairy farmers into receivership in case the resulting mortgagee sales trigger a self-defeating land price collapse.

He said the Government and the Reserve Bank of New Zealand were in discussions with New Zealand's largest banks over how to handle a second successive year of loss-generating milk payouts.

Dairy commodity prices have more than halved over the last year, driving milk payouts to more than 10,000 farmers below the NZ$5.50 per kilogram of milk solids level seen as break-even for most. Dairy farmers owe banks over NZ$35 billion and the RBNZ warned in May it was watching how the ten per cent of farmers responsible for over a third of that debt cope with low payouts.

English's comments came after a report that a bank was forcing dairy farms into the arms of receivers in South Canterbury, although the report did not give details of the bank or the farms involved.

English agreed a payout of as low as NZ$2.40 a kilo, which was one scenario suggested last week by National Australia Bank's BNZ, would be disastrous.

Fonterra's current forecast is for a NZ$5.25 a kilo payout in the current season to May 31, 2016, but most economists have cut their forecasts to below NZ$4 a kilo because of recent falls in prices on international markets.

English was then asked if the Government was talking to banks to "go easy" on indebted dairy farmers.

"It's a topic that we've been discussing and the [RBNZ] is certainly discussing it because of their interest in financial stability," English said.

He said banks would have to support a relatively small number of farmers with high debt levels.

English said banks had been careful in the last downturn in 2008 and 2009 "because they understand that if they push too hard they could create a broader problem by pushing land prices down if they try to sell too many farms."

"All the indications are they understand the scale of the problem and they are going to be pretty considered in how they deal with it," he said.

ANZ has the largest exposures to New Zealand's dairy sector, although it has pared them back over the last two years. ANZ reported its agricultural lending, which includes sheep, beef, horticulture and wine was flat at NZ$16.1 billion over the year to March and its market share has fallen to 31 per cent from 34 per cent over the last three years.

BNZ and Commonwealth Bank of Australia's ASB have been growing market share in dairying in recent years. ASB's market share in farm lending rose to 16 per cent from 14 per cent over the last two years, while BNZ's rose to 22 per cent from 21 per cent.

Cashflows are constrained, but collateral levels have remained strong so far. Dairy farm prices have surprisingly remained robust over the last year despite the slump in dairy payouts from the record high NZ$8.40 a kilo in 2013/14. Foreign buyers have helped prop up prices.

The Real Estate Institute of New Zealand reported earlier this month that the median dairy farm price for 64 farm sales was NZ$35,531 per hectare in the three months to June, which was actually up 5.9 per cent from the NZ$33,543 a hectare seen on 69 property sales on the same quarter a year ago.

Some softness is apparent though, although nowhere near the potential crash in the payouts.

REINZ's Dairy Farm Price Index, which adjusts for farm size and location compared to the median price, fell by 5.5 per cent in the three months to June compared to the three months to May and was down 0.3 per cent from a year ago.