Rural debt has risen $1 billion since January as livestock farmers react to falling incomes.
Reserve Bank figures show debt increased from $61bn in January to $62bn in June, with interest-only debt rising from $30bn to $32bn and revolving credit lifting from $18bn to $19bn.
ANZ agriculture economist Susan Kilsby said while consumer confidence is globally weak, it is especially so in China where people are focused on rebuilding their savings rather than spending.
A collapse in the housing sector and China’s 21.3% youth unemployment rate are other factors.
Youth unemployment has soared following government changes to how foreign-owned companies can repatriate profits from their China-based manufacturing businesses, prompting manufacturing to transfer to other countries.
She said farmers, especially dairy, have in recent years paid back a substantial amount of debt, which has strengthened balance sheets and will help them to weather this economic cycle.
The majority of rural sector loan terms have expired and been reset at higher rates.
She said land prices have been under pressure since last year, with listings outstripping buyers while changes to the Emissions Trading Scheme have created uncertainty among potential forestry investors.
A Ministry for Foreign Affairs and Trade report notes that China recorded deflation of 0.3% in July while weak demand has pushed factory gate prices to rates last seen in 2016.
Annual export growth has contracted for four consecutive months while imports fell 12.4% in the year to July following a 6.8% year-on-year decrease in June.
ASB economist Nathaniel Keall said he does not see interest rates easing for at least a year and said wages are also likely to stay high.
Asked if NZ exporters are too reliant on China, Keall said the size of that market makes it impossible to ignore.
Aidan Gent, ASB’s rural banking manager, expects fewer people will be seeking to buy farms in the coming season, which could lead to softer land values.
Bank leaders are urging farmers to talk to their professionals, to control what they can control and develop a plan to deal with what they view as a cyclical downturn.
They all reiterate their support for the industry and confidence in its medium- to long-term future.
Bruce Weir, Rabobank’s country banking manager, said the sector has been through cycles before, with 23% interest rates and the 2014-15 dairy downturn, and he is confident farmers will endure.
He said farmers should reduce nonessential spending and make short-term decisions that will not greatly impact their long-term viability.
Rabobank has held 19 Financial Skill workshops which have attracted 300 people, and plans to hold more.
BNZ senior economist Doug Steel said as farmers protect cashflow, the impact will be felt through the whole economy.
He sees some green shoots in the level of debt repayment, a weak NZ dollar and the fact the low prices will force a global correction especially with dairy production.
The bank’s agribusiness manager, David Handley, said the current environment is challenging for farmers with low commodity prices, inflated farm working expenses and high interest rates, which will create cashflow pressure.
Options include moving loans to interest-only and providing increased working capital facilities where appropriate.
Handley said it is too early to know the impact on debt levels and land values, which will depend on how long commodity prices stay low and interest rates stay high.
Westpac senior agri economist Nathan Penny said while the coming year will be tough, the medium- to long-term prospects remain bright.
Milk production globally, apart from in China, is under pressure, grain prices are rising and weather has impacted production in the northern hemisphere.
“There are a few factors that could swing things in the favour of the milk price, but I would put that in a ‘keep an eye on this’. I would not rely on it,” he said.