The level of debt held by the rural sector has doubled in five years, prompting the Reserve Bank to warn some heavily indebted dairy farmers they face selling all or some of their operations.
In his financial stability report released this week, bank governor Alan Bollard said the dairy sector accounted for two thirds of total agricultural lending, which had grown from about $21 billion in 2004 to $45 billion in 2009.
In comparison, the debt of grain, sheep and beef farmers had grown over the same period from about $8 billion to $10 billion.
The dairy sector's total debt loading was heavily skewed, Dr Bollard said in his report, with a small number of dairy farms holding a disproportionately large portion of debt.
"A number of farms are now experiencing significant financial distress and are working hard to cut costs and reduce debt levels. Banks are continuing to work with borrowers where possible. However, some farms are holding too much debt and will be forced to sell some, or all, of their operations," he said.
The bank report quoted a Ministry of Agriculture and Forestry survey on debt servicing costs for 200 dairy farms on a dollar a kg of milk solids (kg/ms).
It showed the bulk paid between 50c kg/ms and $2 kg/ms, but about 4% of those surveyed paid from $3 to $4.50 kg/ms.
The same Maf survey revealed most farms had working expenses, excluding interest servicing costs and drawings, of between $2.50 kg/ms and $4, but those had been pruned back since last season.
Maf estimated the breakeven payout for a median farm in 2009-10 was $4.91 kg/ms, but said there was a wide variation in farm working expenses.
Intensively farmed properties in less traditional dairying areas tended to have significantly higher cost structures than more established farms, making them vulnerable.
Dr Bollard said the pressure would come off farms, with Fonterra first lifting its forecast payout to $5.10 kg/ms and then, this week, to $6.05 kg/ms.
