Agricultural borrowing is up more than 9% on a year ago and Westpac is cautioning that the present stability in dairy farms holding their value is now under increasing pressure.
With farm prices holding, dairy farmers have some equity to borrow against, in the face of plunging dairy prices which is expected to push most into negative cashflow positions.
Westpac's chief economist Dominick Stephens said the financial strain on dairy farmers was already becoming apparent and agricultural borrowing was up 9.3% during the past year.
He said dairy farmers were having to borrow to manage themselves through the current period ''of little or no operating cash flow''.
As a result, Mr Stephens said ''cost control'' would become increasingly important during the next year, but it would also have knock-on effects for rural regions more generally.
Mr Stephens said dairy farmers would have to cut back in areas such as repairs and maintenance, farming machinery, fertiliser, supplementary feed and environmental protection.
He said it was notable that the sale prices for dairy farms had held up so far, despite the sharp drop in milk prices.
''History suggests that divergence won't last, and given the thinness of the market, it may only take a small number of distressed farm sales to establish a new, lower benchmark for farm prices across the country,'' Mr Stephens said.
A lower benchmark farm sale price would, in turn, constrain farmers' ability to borrow against the equity in their properties, he said.
''New Zealand's dairy industry faces a severe test over the next year,'' Mr Stephens said.
