KEY POINTS:
The Reserve Bank has been warning banks to curb their enthusiasm for lending to the dairy farm sector.
Although farm lending at $42 billion represents only about 14 per cent of banks' collective loan book, it has been growing faster than lending to households or businesses.
Lending to the agriculture sector as at September was 22 per cent higher than in September last year, while lending to households was only 6.6 per cent higher and to other businesses 10 per cent higher.
It is heavily concentrated (61 per cent) in the dairy sector, even though dairy farms are a minority of farms, and among newly acquired or converted farms in particular.
A striking graph in the Reserve Bank's financial stability report, released yesterday, shows that since the start of the decade the ratio of farm debt to agricultural output (as measured for GDP purposes) has more than doubled, to levels about three times those prevailing across the economy as a whole.
This reflects the deeply ingrained tendency for higher product prices to be swiftly capitalised into land prices.
High dairy payouts increased the value of not only dairy land but of land capable of conversion to dairying. Debt has risen as land prices have increased.
But that was then and this is now.
From their peak a year ago export prices for dairy commodities have fallen more than a third in world price terms and, even with the currency's sharp depreciation, by a fifth in New Zealand dollar terms, as measured by ANZ's indices.
In the carefully measured language of the financial stability report, "The Reserve Bank considers that agricultural lending has become a riskier component of bank balance sheets, that should be managed carefully".
Governor Alan Bollard said yesterday, at a media briefing on the report's release, that lending to agriculture, especially dairying, had been strong.
"Six months ago we went around the banks discussing how wise that was, given the size of the credit growth and also the expectations about farm prices and dairy prices. We were starting to have concerns," he said.
"Since we have done that the banks have generally cut back the growth in lending to that sector."
It had slowed significantly, he said.
The anecdotal evidence is that the banks have indeed become less accommodating at least of new dairy ventures. Projects need to be viable at a dairy payout of $5.50 or $5.80 a kilogram for the next few years to be considered.
But the specialist rural lender Rabobank, in a series of slap-up dinners for farmers, has been stressing it is still very much open for business.
Rabobank is, so to speak, bullish about the longer-term outlook for dairying, even though it expects global dairy demand to remain well below trend for much of next year.
In the meantime the market for dairy farms is starting to look a bit like the housing market, with a lot of properties on the market testifying to a gap between vendors' and buyers' views of value.
Tighter credit conditions are not an issue just for the dairy sector, of course, or just for New Zealand either.
The financial stability report, while confident of the ability of the banking system to weather the storms ahead, makes no bones about the economic risks facing countries like New Zealand which are heavily reliant on imported credit when there is a global credit crunch.
But there are tentative signs that international credit markets are starting to thaw. Three-month interbank lending rates in the United States have been falling for a month, to a still-high 2.2 per cent from an eye-watering 4.8 per cent on October 10.
On the other hand one of the reasons the New Zealand dollar has fallen is a marked decline in the willingness of both retail and institutional investors overseas to arbitrage the difference between New Zealand and Japanese interest rates and buy New Zealand dollar-denominated securities.
Uridashi and eurokiwi bonds had become an important source of offshore funding - hitting around $55 billion last year - but that is evaporating as the exchange rate moves against the foreign savers and money generally heads for its home port in stormy times.
The Government and Reserve Bank, like their counterparts overseas, have put in place a number of measures designed to ensure banks continue to have access to funding.
The central bank yesterday had its first "TAF" (term auction facility) offering banks $500 million in exchange for mortgage-backed securities. Government guarantee schemes first for retail deposits and then for banks' wholesale borrowing are available, at a price.
But such measures can only mitigate the economic damage done by the destruction of vast amounts of bank capital globally, which removes (until it is replenished) even vaster amounts of lending power from the global banking system.
So in this environment of falling commodity prices and scarce capital the only question about the bubble in dairy land prices which has developed is whether it deflates in a gradual, orderly way or bursts messily.
It illustrates a more general point, however, which is relevant to the renewed efforts to weaken (or in Act's case scrap) the emissions trading scheme.
It is not only product prices but other influences on farm profitability that get capitalised into land prices.
When agricultural emissions are brought into the scheme - currently not until 2019 and heavily grandfathered then - it will of course represent a new cost and all else being equal will reduce the profitability of livestock farming.
Land prices will adjust to that, leading with a lag to lower interest bills to offset the cost of carbon.
In the late 1980s farmers faced an economic tsunami when subsidies were removed, interest rates shot up as the Reserve Bank was given the task of curbing inflation, and the dollar was floated and shot up, decimating export returns.
By 1989 land values in real terms had fallen to 45 per cent of their 1982 levels. It was painful. But it was not the death of pastoral farming.
Putting a price on carbon emissions, by contrast, is a much milder shock. And hardly a surprise. By 2019 it will be 22 years since the Kyoto treaty was negotiated.
The Kyoto obligation means any concessions to emitters are at the expense of taxpayers. They used to call that a subsidy.
Act thinks it is okay to pull out of Kyoto and renege on a solemn international agreement which every developed country, bar the United States, has entered into. Would that be costless for dairy exporters?
Speaking to the Environment Defence Society before the election National environment spokesman Nick Smith said he found Fonterra more realistic about the market access implications of climate change policy than Federated Farmers, because it is closer to the market. How it stands up to ferocious lobbying and special pleading on this issue will be an early test of the new Government's spine.
