CALVES enjoy a feed on a Mairoa dairy farm.
BANKS are expecting defaults among dairy borrowers to rise over the coming year, because there tends to be a time lag between cash flow stress and default.
The Reserve Bank’s November 2023 Financial Stability Report states a prolonged period of low dairy prices or a further reduction in prices is more likely to exhaust the cash buffer of farmers with weaker balance sheets, leading to materially higher default rates.
Beef and sheep sectors were facing similar challenges related to soft export prices and elevated expenses, the report said. The forestry sector was also affected by a fall in the price of emission units, from the sale of which the sector derived revenue, in addition to lower forestry export prices.
But the beef and sheep and forestry sector risks to the financial system were smaller than dairy, because they tended to be more equity-financed and represented a smaller share of bank lending.
Profitability is expected to be reduced by the decline in expected payouts and increased debt servicing cost.
The average breakeven dairy revenue per kgMS for the 2023/24 season is estimated to be around $8, higher than the expected payout. Recent farm-level analysis provided by Figured (which operates a financial management platform for farmers) suggests about half of dairy farms would make a loss if the final milk price were to settle at $6.75, and over 60% could make a loss if the price fell further to $6.25.
How long farmers could operate under those conditions depended on factors such as indebtedness, access to working capital, cost structures and scale.
Credit demand in the dairy sector is expected to continue falling in coming months, owing to subdued investment intentions by farmers, and in line with lower profitability in recent quarters. Meanwhile, demand for working capital has surged as some farmers use credit facilities to support their cash flow amid rising stress.
Banks perceive most of their dairy customers to be reasonably well-placed to weather a short period of low payout. Significant deleveraging in the sector in recent years has contained debt servicing costs and supported the option for many farmers to go interest-only to alleviate cash flow stress.
