The threat from lower milk prices to New Zealand producers is poised to hit home, Fitch Ratings said, cautioning of “pressure” on asset quality at banks with significant loans in the dairy sector.
Dairy prices, as measured at New Zealand-based GlobalDairyTrade auctions, have tumbled by 38% year on year, undermined by strong production in major producers at a time when a step back by Chinese importers from the market has undermined demand.
While New Zealand dairy producers have been cushioned so far from the sharp drop by weakness in the New Zealand dollar, and by the support to finances from strong milk prices in 2013-14, this protection is poised to weaken, a second season of low prices may cause more significant damage.
Fonterra, which processes the vast majority of New Zealand milk, last week cut its forecast for milk prices to farmers to a seven-year low of $4.40 per kilogramme of milk solids.
While the co-operative pegged the price for 2015-16, which started this month, at NZ$5.25 per kilogramme of milk solids, that remains below cost of production for many farmers.
Producers’ group DairyNZ estimates the cost of output “for the average farmer” at NZ$5.25 per kilogramme of milk solids.
New Zealand’s central bank warned last month that up to 25% of the country’s dairy farmers could suffer negative cash flow thanks to low milk prices.
‘More vulnerable to rising rates’
“A second year of low milk prices will raise asset quality pressure at New Zealand banks,” Fitch Ratings said.
“The failure of prices to recover towards the long-term average of NZ$6.00 per kilogramme of milk solids by mid-2015 will exert pressure on asset quality within banks’ dairy exposures.”
The situation may prove especially acute if expectations reverse of an easing in New Zealand interest rates ahead.
“Dairy farmers are more vulnerable to rising interest rates than in the past,” Fitch said, noting that the proportion of sector loans set at floating borrowing costs was 72% as of a year ago, compared with 16% in 2008.
Central bank data has also pointed to a concentration of loans among a few borrowers, with 10% of New Zealand dairy farms accounting for about one-third of the sector’s debt.
‘Significant negative cashflows’
The Fitch comments come a week after DairyNZ warned that, thanks to low milk prices, “we will see most farmers facing significant negative cashflows for much of the next 12 months leading to an increase in debt and overdraft expenses”.
It estimated the average New Zealand dairy farm having a bank overdraft of more than NZ$200,000 as of last month.
Tim Mackle, the group’s chief executive, unveiling a plan to support producers, said that “we’ll particularly need to support those farmers who have just bought farms or who are first year sharemilkers as they will have more debt to manage”.
(Source – http://www.agrimoney.com/news/low-milk-prices-to-raise-pressure-on-nz-bank-loan-books–8421.html)