Financial stability, rather than economic growth, might be the biggest risk from low dairy prices, a HSBC report says.
Low prices have already had an impact on New Zealand's dairy export earnings and that shock was still flowing through to farmers, with this season's farm-gate milk price forecast to be the lowest in nearly a decade.
The implications for real activity levels were less clear, economists Paul Bloxham and Daniel Smith said.
Dairy production was expected to fall modestly in the current season but the bigger risk was that low farming incomes affected other forms of activity, such as investment and retail sales.
Fortunately, the New Zealand economy did have other significant areas of strong growth, with a ‘‘booming'' tourism sector and construction activity also ‘‘ramping up'', driven by Auckland where significant demand had built up for new housing and infrastructure, the report said.
While the impact on growth should be manageable, low dairy prices did pose risks to financial stability.
As of June 2015, the dairy sector represented about 10% of all domestic bank lending and about 23% of all non-housing lending.
By comparison, Australia's resources industry, which had also had challenging conditions recently, accounted for only about 2% of Australian bank lending.
The longer prices stayed low the greater the risk that losses on that lending would start to ramp up and affect the banking sector.
Just how much dairy debt ‘‘turns bad'' would depend on dairy prices over the next few seasons and the sensitivity of land prices to developments in the dairy price.
Lower land prices would increase loan-to-value ratios (LVRs), with high LVRs more likely to lead to default.
Rabobank's latest Agribusiness Monthly showed milk production across New Zealand rose about 4% for February, despite dry conditions across much of the country.
That was as a result of weaker comparables, following last year's drought. However, production remained -2% season-to-date.
All eyes would be ‘‘looking to the skies'', with the weather playing a key role in how the tail-end of the season shaped milk production over the coming weeks.
