Dairy-dominated debt easing

A significant slowdown in agricultural debt growth is being attributed to the strong New Zealand dollar, stagnant land prices, and a move to lower funding costs for a large number of farms.

While total debt growth across the agricultural sector had increased substantially since the early 2000s, driven principally by expansion of the dairy industry, debt levels had flattened out over the past three years, a report from Forsyth Barr said.

A reduction in industry debt levels still appeared necessary, particularly in dairy, however the investment firm expected sustainable levels to be reached within the next two to three years for most farmers.

Debt in the dairy sector had driven the agricultural debt acceleration, climbing almost threefold from $11.1 billion in 2003 to $30.5 billion, representing more than 64% of agriculture debt.

That debt was spread unevenly among farmers, with about half held by a mere 10% of dairy farmers, the Ministry of Primary Industries latest Situation and Outlook for Primary Industries report said.

Debt financing over the past decade was partly required to fund numerous capital-intensive conversions.

While there was a strong correlation between the increase in debt and dairying land during the six years ending June 2009 - the period of strongest debt growth - the 15.5% annual average growth in debt during that period, was only associated with a 2% annual increase in dairy land.

A significant proportion of the debt accumulated during that period could be attributed to price inflation for dairy land, which averaged 12% annually.

That had left a ''significant number'' of dairy farmers vulnerable to a fall in the milk price or in land prices, while the drought had further increased the vulnerability of most North Island dairy farmers.

A higher milk payout would assist farmers to service debt, but some of the most heavily indebted might still have difficulty in doing so, the report said.

Given the high Fonterra share price, Forsyth Barr believed farmer shareholders had an incentive to reduce their shareholding to pay off debt.

 

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