Many dairy farmers are highly indebted and financially vulnerable if prices drop on international commodity markets, the Reserve Bank warns
Housing is not the only area of significant risk to the New Zealand economy, according to Reserve Bank Governor Adrian Orr. Financial inclusion, climate change, commercial property and dairy are all causing vulnerabilities – but the public seems less interested.
“House prices sell newspapers,” Orr said, somewhat plaintively.
So we examined the other area that Wednesday’s Financial Stability Report expressed “considerable concern” about – the threat to bank balance sheets posed by dairy farmers up to their necks in debt.
What it revealed is another sector – like housing – in which the Reserve Bank and the Government do not see entirely eye to eye.
“Farm debt is nothing new,” agriculture minister Damien O’Connor told Newsroom last night. “This is a productive sector that has always survived on high levels of debt.
“Freshwater regulations were well signalled by the Government and most farmers have incorporated them into their business plans.
We’ve talked about rural loans, in some parts, being well over-stretched. We talk about this in this document for those other listeners interested in things other than houses. We talk about dairy, we talk about commercial property, we talk about a lot of areas where concentrated loans are causing vulnerabilities.
– Adrian Orr
“The Reserve Bank noted that banks are working with dairy farmers to take advantage of high commodity prices and low interest rates. This will reduce their financial vulnerability.”
It’s the opposite of the impasse with Finance Minister Grant Robertson over reining in house prices; in the case of dairy farms, the RBNZ is more concerned than the Government. And Orr called yesterday on banks to take some responsibility for heading off out of control dairy debt.
“We are talking about banks using their nous, using their risk appetite statements, being sensible, being courageous,” Orr said. “Otherwise it’s a regulatory impasse, and we’re back being at the table having to own these things.”
According to this week’s report, banks’ limited appetite for new dairy lending also reflects concerns around the cost of compliance with new environmental regulations, such as the stock exclusion from waterways, the nitrogen fertiliser cap, and the introduction of agriculture to the Emissions Trading Scheme in the near future.
Farmers, unlike home owners and property investors, share the economists’ concerns about their vulnerability to a downturn.
Richard McIntyre, a dairy farmer from Rangitikei who serves as a Federated Farmers rep, says the price for milk powder is good at present, but the banks are taking the opportunity to try to claw back debt..
“It’s like if you bought a house in a residential area, expecting it to always be a house in a residential area, and then it suddenly got zoned industrial, you wouldn’t have that much confidence to buy houses in the future. There’s a diminished business confidence.”
– Richard McIntyre
Calf prices are low, and farm sale prices are down meaning they have less equity. That is tied to the biggest challenge of all, the enormous costs to comply with freshwater and climate change regulations
“There’s lot of uncertainty at the moment about what that’s going to look like, and how they’re going to fund that and stay solvent,” McIntyre said.
They are having to make big changes to their farm systems to address winter grazing, dissolved inorganic nitrogen levels, and more. And all the changes and added costs meant farmers are nervous about borrowing money to invest in their farms, and banks are trying to get their money back.
The regulatory goalposts had changed, he said. The changes to the rules around how they managed their land were so significant that it was as if the entire ground was shifting under their feet.
“It’s like if you bought a house in a residential area, expecting it to always be a house in a residential area, and then it suddenly got zoned industrial, you wouldn’t have that much confidence to buy houses in the future. There’s a diminished business confidence.”
“I think there’s a lot of things playing on people’s mental health, urban and rural. There’s a lot of concern about where things are heading globally, and about labour supply, especially short-term rural workers, machinery contractors and vets.”
– Nick Clark
Farmers were feeling economically and emotionally fragile, he said, and Damien O’Connor needed to understand what they faced. “I recognise why he’s being dismissive, but if you talk to any farmer they won’t be saying the same thing.”
“There’s a lot of emotional vulnerability at the moment. Last year we were dealing with the whole dairy carbon side of things, and I think we’re working well with government now though it’s still going to be a huge challenge,” McIntyre said. “But if you add the whole freshwater regulations as well, which don’t actually complement what we have to do to lower methane emissions, it just becomes difficult.
“Add the stress of Covid and the difficulties around stock getting into the freezing works during lockdown, especially for farmers hit by drought, and we feel like we’ve been under siege for a couple of years.”
“There are large parts of the dairy sector that have high levels of debt and remain very vulnerable to any downturn in the sector,” he said. “Housing does tend to generate all the headlines, but the challenges in dairy are reasonably significant … and present some risk to bank balance sheets.”
– Chris Bloor
Federated Farmers policy manager Nick Clark agreed. He said dairy farm debt may not be the biggest part of banks’ balance sheets, but it’s very concentrated. So he could understand the banks’ caution about lending, and trying to call in their debt.
“In some cases, there are some farmers that have had to be moved on. The banks are always cautious about that, because if they move too aggressively they’ll tank the land market.”
Federated Farmers has just completed a survey of its members, with more than 1300 responses, that will track their increasing concern about banking conditions.
“I think there’s a lot of things playing on people’s mental health, urban and rural. There’s a lot of concern about where things are heading globally, and about labour supply, especially short-term rural workers, machinery contractors and vets.”
Chris Bloor has helped prepare 23 Reserve Bank Financial Stabilility Reports over the years – this week’s one was his last. He’s moving to run the bank’s policy analysis team – which will include responsibility for housing policy work.
“There are large parts of the dairy sector that have high levels of debt and remain very vulnerable to any downturn in the sector,” he said. “Housing does tend to generate all the headlines, but the challenges in dairy are reasonably significant … and present some risk to bank balance sheets.”
He said dairy farms accounted for about 10 percent of bank lending. “So it’s not nearly as large an exposure as housing is, but it’s a more vulnerable exposure, So we don’t think this is the sort of risk that would derail the financial system as a whole, but it’s certainly an area where they could face challenges and have material non-performing loans if there’s a downturn.”
