The borrowing agriculture must prepare risk assessments: Reserve Bank

Financial tensions in the dairy sector are easing, but the Reserve Bank is urging the heavily indebted agricultural sector to continue cleaning up its balance sheet, as risks are imminent.

In its November report on financial stability, the Reserve Bank said that agriculture accounted for about 14 percent of total bank loans, worth nearly $ 70 billion.

This level of debt limits the sector's ability to withstand market downturns, invest and adapt to future long-term challenges, including the impacts of climate change.

Two-thirds of the $ 41.5 billion in agricultural debt came from the dairy sector, which had become heavily indebted after a series of major investments, an increase in land prices and two strong milk price declines over the last decade, said the Reserve Bank.

Dairy farms' balance sheets remain tense, but milk prices have been favorable for profitability, while revenues have improved in the 2018-2018 season.

However, prices had fallen by 20% since May.

Most dairy farms are expected to be profitable this season, but further declines in world prices for dairy products could put profits under pressure, the bank warned.

Debt in the sector remained concentrated and some holdings bore disproportionate debts.

"Financial strains in the sector have decreased but the sector is vulnerable to further price declines as well as long-term challenges," said the central bank.

Improved milk prices have enabled farmers to reduce their debt, and banks are increasingly structuring their loans according to repayment terms of principal and interest.

Faced with the long-term challenges facing the agricultural sector, the Reserve Bank has identified livestock disease, Mycoplasma bovis, currently at the center of an almost $ 1 billion eradication effort. led by the government and the industry.

Compensation limited the financial impact on infected farms, but may not cover all the costs of the disease and many would need to improve their biosecurity practices.

"The financial impacts could be greater if eradication is not achieved." The agricultural sector already bears the costs of stricter regulation aimed at reducing waterway pollution and mitigating water pollution. 39, other environmental concerns. "

The consequences of climate change should be on the radar of agriculture, the report said.

Farms must be ready to invest and adapt to future challenges and opportunities.

As debt levels of agriculture limit its ability to withstand market downturns and invest in adapting to these long-term challenges, it was encouraging to see many dairy farms repaying their debts said the bank.

"Banks have a role to play in ensuring that their lending decisions take into account relevant risks, including long-term risks, where prudent banks may need to finance the investments that farms must make to improve sustainability. . "

Banks have diversified their lending to agriculture, which could help counter the risk that any sector presents to the financial system, said the Reserve Bank.

In the past two years, banks have increased their lending outside the dairy sector, with growth in horticulture loans being "particularly high", at about 15% over the same period until September. Loans to the dairy industry have increased only slightly.