New Zealand banks are probably taking a close look at their lending to dairy farmers as global prices plunge and many in the industry brace for a third season of potential losses, Finance Minister Bill English said.
“I would be surprised if they weren’t having another good look,” English told reporters in Wellington Tuesday. “The banks pay a great deal of attention to the risks they are taking. They are required to by the Reserve Bank.”
Fonterra Cooperative Group’s payout to farmers nearly halved in the season ended May 31, 2015 and last month it projected its 2015-16 payout could fall further to a nine-year low. As global dairy prices decline, economists have lowered their forecasts for the 2016-17 distribution. The central bank last year estimated that 80 percent of New Zealand dairy farmers may be operating at a loss.
“It looks like the payout is going to be lower for longer, so it’s likely people are re-doing their budgets on the farms, and probably the banks are having another look at those small number of farmers who will be under real pressure,” English said. He said he hadn’t been advised that any particular bank was concerned about its lending to the sector.
National Australia Bank today said it had included a small number of New Zealand dairy exposures valued at A$420 million ($301 million) as impaired assets in the three months ended Dec. 31. The exposures were defined as “impaired but no loss expected,” the bank said in a filing.
The Reserve Bank of New Zealand has done stress testing of the banking system to see what happens in the event of plunging dairy prices and payouts, English said.
“The advice I’ve had is that even under some extreme scenarios there’s a small number of manageable losses” in the industry, he said. “This is a sector with a pretty strong balance sheet and a good long-term future so, while the pressure seems to be growing for now, we’re confident that between the banks and the farmers they can get through it.”