The Reserve Bank yesterday added more forecasts to the “worst case scenarios” produced by Treasury and published by POLITIK yesterday.

Under the worst case scenario for the dairy industry, the Bank looked at what would happen if the payout fell from $4.15 to $4.00 this season and then rose by only 50 cents a kg a year.

Under this scenario it forecasts that farm land prices would drop by 40% by 2018 -19 and 44% of all the debt owed by dairy farmers would be in non performing loans.

The implications of that for the economy as a whole would be devastating but the margins between what is being paid for milk now and the figures to produce the worst case outcome are narrow and finely balanced.

The Reserve Bank has asked those institutions which lend money to dairy farmers to “stress test” their loans using the worst case scenario, the current price forecasts ($4.15 this season then $5.50 next season) and a mid point between the two scenarios.

The Bank published its second Financial Stability Report for the year yesterday and said: “Low milk prices are resulting in a second consecutive season of negative cash flow for many dairy farms.

“There is an elevated risk that highly indebted farms could come under significant financial stress, especially if farm land values decline.

“While milk prices are expected to recover over the medium term, global supply dynamics could slow the rate of recovery.”

Dairy futures traded on the NZX show only modest price increases through to the middle of next year.

But what could complicate things is if the El Nino expected over summer produces intense droughts in dairying parts of New Zealand.


The last extra big El Nino in 1998 mainly affected sheep farming districts on the east of both islands.

“But the Reserve Bank is worried about the townies as well.

“House price inflation has continued at a rapid pace in Auckland, driven by low interest rates, strong net immigration, supply shortages, and an increase in investor activity.

“House price inflation has been accompanied by increased borrowing and a rise in debt-to-income

ratios for new lending.

“Recently implemented restrictions on investor lending are targeted at reducing the rising financial stability risks associated with the overextended Auckland housing market.”

The Bank is particularly worried about investor lending, much of which is at high debt to income ratios and with interest only loans.

“These statistics point to the potential for a sharp rise in investor defaults that could amplify a severe housing downturn, consistent with international evidence,” it says.

In Parliament, Finance Minister Bill English was blaming the Auckland Council for the big house price increases in the city. 

“The responsibility lies with the decision maker, which was the Auckland City Council, and we are reaping the rewards of 20 years of misguided planning that was designed to stop the city growing,” he said. 

“ Secondly, the responsibility lies with the people buying the houses. 

“At a time when we have 50-year lows in interest rates, clearly the buyers believe that they can afford those prices. 

“ I agree that that ratio is far too high, and I look forward to the support of the Labour Party for further measures to help to reduce it.” 

The whole mood of the economic debate has been subtly changing over the past week or so — it is now clear that the country is potentially headed for higher unemployment, slower growth and possibly house and farm price drops. 

Next year is shaping up as a much tougher political year for the Government.