Wednesday, 24 June 2009

Bank lending to dairy farmers NZ equivalent of US sub-prime lending

New Zealand farmers are in debt to the tune of $45 billion, 61% of which is in the dairy sector. This ballooning of debt over recent years is New Zealand's equivalent of the US sub-prime lending that sparked the financial crisis. This is the claim made by Fran O'Sullivan, leading business columnist for the NZ Herald, in her article White gold rush turns deep shade of red. She writes: "Where that farm debt is highly concentrated - eg, at least 20 per cent of New Zealand's dairy farm production - it is such that farms cannot, and will not ever, meet their debt servicing commitments even under the most promising payout and interest rate scenarios. This is New Zealand's equivalent to US sub-prime lending: reliant on continuing asset gains as income was never going to meet debt-servicing commitments." This bank driven "land bubble" is about to burst with dairy prices falling due to falling global demand, compounded by a high NZ dollar. The dairy industry is a huge part of the NZ economy, being the largest exported commodity. A big drop in rural income will drag the whole NZ economy downwards with a flow-on political impact.

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