Dairy farm prices fall


The Real Estate Institute says its Dairy Farm Price Index fell 14.3 percent in the three months to February, compared to the three months to January.

The Index fell by even more -- 20.9 percent -- when compared to February of last year. The Institute says its Index takes account of variations in farm size and location.

The numbers have been released in the same week in which the Reserve Bank released details of stress tests it conducted to see how the commercial banks would cope if there was a sharp downturn in farm prices.

The Reserve Bank of New Zealand (RBNZ) found that the banks could suffer losses of between $1 and $3 billion if there was a sustained fall in dairy farm prices and a rise in loan defaults.

For the three months to the end of February 2016 the median sales price per hectare for dairy farms was $36,687 (76 properties). That compared to $39,367 for the three months ended January (90 properties) and $45,105 (97 properties) for the three months ended February 2015.

The median dairy farm size for the three months ended February 2016 was 121 hectares.

The Institute says it's All Farm Index rose 0.6 percent in the three months to February and was up 6.2 percent on a year ago.

But the median price per hectare for all farms sold in the three months to February was down 7.3 percent compared to February 2015 ($25,970 compared to $28,009).  The median price slipped 5.2 percent compared with January.

Real Estate Institute of New Zealand (REINZ) Rural Spokesman Brian Peacocke says "Favourable climatic conditions over much of New Zealand and the continuation of good returns for the beef and horticultural sectors are bright spots on the horizon which unfortunately, is being dominated by a gathering of clouds and difficult conditions for the dairy industry."

Falling farm prices will put even more pressure on dairy farmers, especially those who borrowed money based on higher land values and higher dairy commodity prices.

The Reserve Bank modeled two scenarios in its recent 'stress tests', to see how the five biggest lenders would cope with a sustained slump in the dairy sector.

The first scenario saw dairy prices remaining below $5.25kg of milk solids until 2019 and a 20 percent drop in land value. That could force a $5 billion write-off in loans, resulting in a loss of about $1 billion.

The second scenario saw the dairy payout remaining below $5 and land values dropping by 40 percent. That could result in write-offs averaging $10billion, with a projected loss to the banking sector of $3 billion.

The tests found that the banks would be able to cope. Most of the losses would be absorbed through its profits, including capital put aside for the expected downturn.

Dairy sector debt totals around $38 billion dollars, which is around 10 percent of all bank lending in New Zealand.