The agricultural sector is facing difficult economic conditions, because of low dairy, meat and forestry prices, high operating expenses and increased debt servicing costs.
Longer term, the sector faces uncertainty about the scale and timing of the costs of climate change, reports the Reserve Bank of New Zealand – Te Pūtea Matua in an extract from the upcoming Financial Stability Report.
“Whilst defaults in banks’ agricultural lending portfolios are currently low, they are expected to increase and could accelerate if there is a prolonged period of high costs and low prices,” says Kerry Watt, Director of Financial Stability Assessment & Strategy.
“It is encouraging that dairy prices have improved in recent auctions, and the deleveraging across the industry over the past few years means most farmers are well placed to manage challenges in the short term,” he says.
“The agriculture sector has huge social and economic significance in New Zealand. Our economy is more reliant on the agriculture sector compared with most other advanced economies and we monitor emerging risks and issues closely to protect the stability of our financial system.”
The agricultural sector represents 11 percent of all bank lending. Within agricultural lending, dairy takes the predominant share, at around 60 percent, with beef and sheep as the second largest category at 25 percent.
Across the agricultural sector, demand has declined from China, which typically purchased one-third of our dairy exports, 40 percent of our meat exports and 60 percent of our forestry exports.
“Defaults, payments overdue by more than 90 days, could increase materially if there is a prolonged downturn in export prices and demand,” says Mr Watt. “Banks tell us they are monitoring the situation and working closely with their rural customers.”
“In the longer term, the agricultural sector faces climate-related challenges and we are focused on safeguarding the stability of the financial system against these risks,” he says.
“We are working with banks to improve their capability in assessing climate risks by stress testing their agricultural portfolios against shocks, including drought, emissions pricing, and other long-term climate risks.”
We explore these issues further in a special topic from our November 2023 Financial Stability Report, which we are pre-releasing today, along with a Bulletin article: the 2022 climate change risk assessment for agricultural lending. Our full Financial Stability Report will be published on Wednesday 1 November.
- Special topic: Developments in the agricultural sector
- Bulletin: 2022 climate change risk assessment for agricultural lending