WELLINGTON, Jan 27 (Reuters) - Cash flow concerns for New Zealand dairy farmers will continue to grow due to persistent low dairy prices, bankers said as Fitch Ratings agency flagged potential increases in bad loans for the nation's banking sector.
Fitch downgraded its view for New Zealand's banking industry due to dairy debt woes late on Tuesday - a move that comes amid worries that farmers may suffer another cut in payouts.
Until recently, dairy was the backbone of the country's economy, representing around 25 percent of exports. But dairy prices have tumbled by more than half since early 2014, hurt by China's economic slowdown and global oversupply.
Dairy-related debt has ballooned after two difficult years, with an estimated 80 percent of farmers operating below break-even levels, according to the central bank. New Zealand dairy giant Fonterra (FSF) has already slashed its forecast payout over the past two seasons and some analysts expect another is in the works.
"We think the global market is going to improve toward the end of this year but it's going to be a subdued recovery. It still means there are going to be cash flow issues going into next season," said Michael Harvey, senior analyst for Rabobank.
Dairy debt represents around 10 percent of total lending in New Zealand. It stood at NZ$37.9 billion as of June, up 9.5 percent from a year earlier, according to the central bank.
Fitch said a prolonged period of low dairy prices could lead to a rise in non-performing loans as well as cutbacks in investment and production.
The view came in tandem with a downward revision to the country's sovereign rating outlook to 'stable' from 'positive', although Fitch kept its rating outlook for the banking sector at 'stable', citing strong capitalisation levels and high net interest margins.
Fonterra currently expects to pay its farmer shareholders NZ$4.60 per kilo of milk solids in the season ending May 31 – below estimated break-even levels of NZ$5.28. ASB rural economist Nathan Penny said he now expects Fonterra to pay NZ$4.10.
John Janssen, head of agribusiness at BNZ, said the dairy sector is holding up and the bank is well provisioned but "each additional year of a sub-five dollar payout creates additional stress."
The main focus will be on Fonterra's payout forecast for the next season, he added.
Ben Russell, head of rural banking for Heartland Bank, said dairy prices are unlikely to recover until well into 2016 and 2017, but the bank remained "very much open for business for farmers".
