By Renju Jose and Lucy Craymer
WELLINGTON (Reuters) -The Reserve Bank of New Zealand said on Thursday defaults in banks' agricultural lending portfolios were expected to increase as the sector faces tough economic conditions due to low prices, high operating expenses and increased debt servicing costs.
New Zealand's agricultural sector has been hit by a sharp fall in prices for a number of commodities including dairy and red meat and increases in farm expenses as fuel, fertilizer and labour costs all increase.
"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," Kerry Watt, director of financial stability assessment and strategy, said in a statement.
Debt servicing costs also have risen dramatically over the past two years as the central bank has hiked the official cash rate from a record low of 0.25% to 5.5%.
“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,” Watt said.
The agricultural sector represents 11% of all bank lending in New Zealand.
Watt added that the agriculture sector has 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," he said.