The Reserve Bank in its November Financial Stability Report noted four key risks that New Zealand’s financial system faces:
* high levels of indebtedness in the dairy sector
* the imbalances in the housing market,
* the potential effects of a slowdown in the Chinese economy,
* the banking systems reliance upon offshore funding.
Since the Financial Stability Report was published, risks in the dairy sector have increased due to the reduction in the current season’s forecast payout. International dairy prices are about a third less than they were a year ago, as a result forecast sector returns for the 2014/15 season are much less than the previous season. Fonterra’s latest Global Dairy Trade auction undertaken in early May reported a further 3.5 percent fall in international dairy prices on a trade weighted basis. The Reserve Bank warns that forced sales of farms could rise if dairy payouts remain low, though farmers would go to great lengths to keep paying their loans. Many highly indebted farmers are facing negative cash flow and lower milk prices will only accentuate the problem.
The graph below shows the actual milk price payouts for the largest New Zealand dairy companies for the last five seasons, along with the forecast payout figure for the current season.
Source: Monthly Economic Review May 2015 – NZ Parliamentary Review