Alternative economic pickup seen from truck sales

HSBC forecasts overall economic growth to be solid (2.4% in 2016) because New Zealand’s economy has some significant growth drivers outside the dairy sector – tourism, services and construction.

“Although post-earthquake rebuild work in Canterbury is starting to slowly tail off, building work elsewhere is rising strongly, particularly in Auckland.

“The construction boom is supporting broader retail sales. For example, New Zealand’s best-selling vehicle model last year was a pick-up truck – the first time a commercial vehicle has outsold all other models.

“Assuming the main customers for pick-up trucks are construction workers and farmers, it seems the impact of lower dairy incomes is being more than offset elsewhere, at least on this metric.”

The biggest risk from low dairy prices may not be to economic growth but to financial stability, according to HSBC economists Paul Bloxham and Daniel Smith.

At June 2015, the dairy sector represented about 10% of all domestic bank lending and about 23% of all non-housing lending.

By comparison, Australia’s resources industry accounts for 2% of Australian banking lending.

The longer prices stay low, the greater effect on the banking sector, HSBC says.

The Reserve Bank estimates the majority of dairy farms will be operating at a loss for the second season in a row at forecast payouts of $3.90 per kilogram of milk solids, below the average estimated breakeven payout of  $5.00-5.30 per kilogram of milk solids.

This is expected to lead to a rise in non-performing loans, HSBC says.

“Just how much dairy debt turns bad will depend on dairy prices over the next few seasons and the sensitivity of land prices to developments in the dairy price.

“Lower land prices would increase loan-to-value ratios, with high loan-to-value ratios more likely to lead to default.

The Reserve Bank’s worst case scenario would see land prices fall 40% if the downturn continues until 2020.

But the banking sector would cope, it says.

HSBC says this would depend on a fairly orderly process of defaults and farm sales because a large number of farms on the market all at once could create a hiatus in the agricultural land market.

“The greater concern is that reduced farming incomes impact other economic activity.

“For instance, investment in the sector is likely to be weak while farmers face cashflow difficulties.

“More broadly, farming income is a vital injection of cash for many rural communities, where lower disposable income for farmers and their employees means retail sales are likely to suffer.”

Meanwhile, a report from Southland says 35 farms have been put on notice they need to sell by the end of the season.

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