Dairy farmers were likely to receive an income boost this season, compared with previous seasons, because plenty of rain had resulted in strong milk production, Reserve Bank governor Alan Bollard said yesterday.
Fonterra recently announced a reduction in the forecast payout for the current season by 15c to $6.75 to $6.85 per kilogram of milk solids.
Releasing the May Financial Stability Report, Dr Bollard said the reduction reflected falling commodity prices and the higher New Zealand dollar reducing revenue for the co-operative.
However, on-farm conditions had been excellent with plenty of rain resulting in strong milk production.
But with prices in Fonterra's online dairy auctions falling further recently, there was a risk that payouts could be lower in coming seasons.
Typically, the exchange rate fell when commodity prices fell, buffering New Zealand dollar returns, he said.
But the current situation of extraordinary monetary stimulus abroad could test that relationship. The exchange rate could stay high while commodity prices fell further.
The agricultural sector had been using increased income from high commodity prices to improve its debt position, Dr Bollard said.
Debt had fallen relative to incomes over the past two years. The sector was still highly leveraged, farmers and lenders were still chastened by a period of weak earnings in the 2008-09 season and farm sales and consents in the past two years had been at a low level.
"With some confidence returning to the market, farm sales and consents have begun to increase over the past year.
The pick-up in farm sales is likely to drive some growth in overall agricultural credit, although to the extent that some sellers are quite indebted and buyers are relatively well capitalised, the pick-up in credit may continue to be limited."
