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NZ dairy farmers strong enough to weather one bad season, RBNZ's Spencer says

New Zealand's dairy farmers have strong enough balance sheets to cope with one season of low payout, but could struggle if they have to tighten their belts for longer, according to the Reserve Bank.

The 48 percent slump in global dairy prices this year, which led Fonterra Cooperative Group to lower its forecast payout to farmer-suppliers to $5.30 per kilogram of milk solids,put the Reserve Bank on notice when assessing risks to the country's financial system, according to the regulator's six-monthly financial stability report. That's because of the risk of an increase in loan defaults and increased risk to lenders.

Farmers had used last year's high payout of $8.40/kgMS to repay debt, and Fonterra's early warning has given them time to manage their operations for the 2015 season. The stability report cited DairyNZ estimates that about a quarter of farms could struggle to meet interest and working expenses on a $5.30 payout.

Reserve Bank officials including deputy governor Grant Spencer appeared before Parliament's finance and expenditure select committee today to be questioned on the report. Labour Party MP Kris Faafoi asked bank officials what impact a lower payout would have.

"It puts pressure on those farmers and if it goes below $5 that's more pressure, but we're also saying the farmers, particularly given that $8.40 last season, that they reduced debt, they stashed a bit away, and they're in a much better position to weather the storm for a period," deputy governor Grant Spencer told Parliament's finance and expenditure select committee. "If it keeps going for two or three seasons, then that's when the pressure really comes on. but certainly for one season they're pretty well placed to cut spending and incur a bit more short term debt to get through that period."

Banks have been aggressively targeting the agriculture sector in recent years as an area that's likely to benefit from the growing appetite of Chinese consumers for high protein products, such as meat and dairy.

Fonterra is holding its annual meeting in Palmerston North today, and affirmed its forecast payout for the current season. Chief executive Theo Spierings has previously said the forecast is predicated on a recovery in whole milk prices.

The Reserve Bank expects dairy prices to recovery early next year, supported by growing Chinese demand, though it said there is a risk of protracted weakness if global supply keeps expanding or if China takes longer to resume its forward purchasing.

Farmers had used last year's high price to repay debt, and the early signalling gave them time to manage down their costs, which helps mitigate the threat posed by the dairy sector.

Earlier today, Spencer told a press conference in Wellington farmers' deleveraging and higher farm prices meant average LVRs on dairy debt had reduced, meaning safety buffers in place on dairy farm debt have improved.

The Reserve Bank said farms using intensive methods on more marginal land and less able to substitute to feed produced on their own farms were particularly vulnerable, with limited scope to manage the downturn, and highly indebted farmers were likely to experience negative cash flow on the lower payout.

Governor Graeme Wheeler told the press conference the bank hadn't given any thought to imposing lending restrictions or ratios on dairy lending, and that about 10 percent of farmers still have about half of the sector's $33 billion in debt.