In its twice-yearly health check of the financial system, the central bank also repeated its warning to trading banks to closely monitor the quality of their lending to horticulture, which is currently growing at an annual rate of 15%.
The bank’s Financial Stability Report noted agriculture’s status as an essential industry and the relatively rapid recovery of its biggest export market in China, meant the sector had come through the initial stages of covid-19 in better shape than others.
However, it continued to express its long-standing concerns with the level of heavily indebted dairy farms.
It said the trading banks had been working with these to take advantage of relatively buoyant commodity prices and low interest rates to payback principal.
There was also less demand for credit as dairy farm expansions tailed off and farmers took a more cautious approach to investment in light of the uncertainty created by the pandemic and the global recession.
Annual dairy credit growth turned negative in July last year, and is currently contracting at an annual rate of 5%. That compared to marginally positive credit growth for sheep and beef farms, and almost double digit growth for other agricultural lending.
“However there are still a number of dairy farms that remain financially vulnerable,” the report said.
The report showed 3% of dairy loans in default for 90 days or more.
Classified by the trading banks as non-performing loans, that percentage has not moved since August last year when it ticked up from 2%.
However, lumping together non-performing and potentially stressed loans the figure rises to 11%.
Potentially stressed loans are those where the international ratings agencies have given the loan a junk-grade investment rating and are at a high chance of default.
According to the Reserve Bank, the level of non-performing and potentially stressed dairy loans, while steady in the past couple of years, have failed to get back down to the lows of the mid-2010s.
That compares to other agricultural loans where non-performing and potentially stressed loans fell sharply following the Global Financial Crisis, and stayed down, currently sitting at just 6%.
“This is particularly significant as some dairy farms remain highly (heavily) indebted after experiencing two downturns in the last decade and require a high milk price just to remain operational,” the Reserve Bank said in its report.
The report noted that appetite for lending to the agricultural sectors remained steady, although banks were less willing to lend to dairy farmers because of increasing environmental regulation and the potential for increased costs coming from requirements to exclude livestock from waterways, restrictions on fertiliser use and the entry of farming more generally into the Emissions Trading Scheme (ETS).
Funding previously deployed to dairy lending was now finding its way into the horticultural sector.
“Horticulture lending, led by the kiwifruit industry, is growing at an annual rate of 15%,” the report said.
“Banks will need to monitor emerging risks with this growth, in light of potential constraints to labour availability in the near term due to the ongoing border restrictions.”
In its last Financial Stability Report in May, the Reserve Bank raised similar concerns but predicted increasing unemployment locally would offset the shortage of immigrant workers.
But with unemployment failing to reach the high levels predicted, the Reserve Bank left off that qualification in its latest report.