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Dairy price drop putting NZ at risk BY MICHELLE NELSON MICHELLE.N@THEGUARDIAN.CO.NZ
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Falling dairy prices are putting the country’s financial security at risk, the Reserve Bank says. In its six-monthly Financial Stability Report, released yesterday, the bank estimated about a quarter of all dairy farms will be operating on a negative cash flow this season. The report found 11 per cent of farm debt is held by farmers struggling with both a negative cash flow and high loan-to-value debt ratios – above 65 per cent. Twenty-five per cent of farms account for 32 per cent of the sector’s $29 billion debt. Grow Mid Canterbury CEO Rob Brawley said it was difficult to know how the figures translated locally. “We have high levels of investment here, but I don’t know how high the debt underpinning it is,” Mr Brawley said.
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“We have had really strong land price growth over 15 years, so it might not be as bad as it seems.” While deferred payments from last season’s record payout of $8.40 per kilogram of milksolids have helped ease the predicament for some farmers, the Reserve Bank forecasts problems ahead if prices stagnate or worse still, continue to slide. Fonterra’s farm gate payout for this season is currently sitting at $4.50kg/ ms, excluding dividends, but based on recent international dairy auctions, it could drop further, the bank said. This is well below the average cost of production, estimated by DairyNZ at $5.40kg/ms. The Reserve Bank report anticipated milk prices would strengthen next season, but said that would be dependent on the recovery of the Chinese market, which dropped off last year.
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Mr Brawley said farmers were braced for the milk price to drop, and were well prepared. “We have been through dairy price downturns before – but the difference this time is it’s come on the back of a record payout last year. “Most farmers would have had surplus payout to service debt. Banks have told me there’s been a lot of debt reduction and shoring up cash flows.” However, Mid Canterbury’s intensive irrigated dairy farms are locked into a high level of spending, which is difficult to trim back. “For our overall economy that’s a good thing – because they have to keep spending, but they can and will reduce discretionary spending,” Mr Brawley said. Fonterra is set to release its forecast for the 2016/16 season later this month, and all indications point to it starting around the $5kg/ms mark.
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