The Reserve Bank says the agricultural sector is facing difficult economic conditions, with low dairy, meat and forestry prices, high operating expenses and increased debt servicing costs.

The RBNZ has released an extract from next week's Financial Stability Report, raising concerns about the challenges facing farmers, such as uncertainty about the scale and timing of the costs of climate change.

"Whilst defaults in banks' agricultural lending portfolios are currently low, they are expected to increase and could accelerate if there is a prolonged period of high costs and low prices," RBNZ director of financial stability assessment and strategy Kerry Watt said.

"It is encouraging that dairy prices have improved in recent auctions, and the deleveraging across the industry over the past few years means most farmers are well placed to manage challenges in the short term."

He said the agriculture sector had huge social and economic significance in New Zealand.

"Our economy is more reliant on the agriculture sector compared with most other advanced economies and we monitor emerging risks and issues closely to protect the stability of our financial system."

The agricultural sector represents 11 percent of all bank lending, with dairy taking up about 60 percent of the financing, followed by beef and sheep as the second largest category at 25 percent.

Watt said the sector was struggling with falling demand from China, which typically purchased one-third of the dairy exports, 40 percent of meat exports and 60 percent of forestry exports.

"Defaults, payments overdue by more than 90 days, could increase materially if there is a prolonged downturn in export prices and demand," he said.

"Banks tell us they are monitoring the situation and working closely with their rural customers."

Watt said the climate-related challenges also posed a significant risk to the financial system.

"We are working with banks to improve their capability in assessing climate risks by stress testing their agricultural portfolios against shocks, including drought, emissions pricing, and other long-term climate risks."

Reproduced with permission