Banks preparing for farmers to default on loans

Banks preparing for farmers to default on loans

Dairy prices are taking so long to rebound, some in the industry are saying it's now inevitable a number of farms are going to end up being sold off to avoid taking on further debt.

Debt in the sector is at $40 billion and rising. In 2002, it was only $10 billion.

Agribusiness expert Dr James Lockhart of Massey University says "extraordinarily positive behaviour" from the big banks has "masked" the problem to date, but something has to give - and soon.

"The rural sector has taken on more debt to overcome the short-term gap between income and expenses," Dr Lockhart told Paul Henry this morning.

"The banks are working desperately with their farm clients to try and uphold and keep their equity intact. What they don't want to see is a run on rural properties."

Recent sales have seen farms go for "35 - 40 percent less than what they would have sold for 18 months ago," says Dr Lockhart.

"It's that sort of exposure that the whole sector is trying to avoid, and banks in particular."

ASB has set aside $130 million in impairment provisions, more than it has ever lost in farm defaults before.

Dr Lockhart says last week's lift in the GlobalDairyTrade auction price was the "first glimmer of hope that we've received for the best part of two years", but unlikely to be the first of many lifts the sector needs.

Whole milk powder, New Zealand's major dairy export product, leapt by 9.9 percent to US$2,265 a tonne.

But for now many are playing a "macabre" waiting game, with the next critical point for many farmers expected in October and November.

"There won't be the big retro payments that have come on from a previous season, so that's the next critical crisis point for cash on dairy farms in New Zealand, and our banks have to try and work with their farmers to try and get them through."

Fonterra last week held its forecast milk payout for this season at $4.25/kg of milk solids. With earnings of between 50 and 60 cents per share, shareholder farmers are looking at between $4.75 and $4.85 - below the estimated breakeven point of $5.05.


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