Clock ticking for some farmers

He told Dairy News the bank is having to work very closely with such people.

Unless the payout rises to $4.50-$5.50 in the next 18 months, heavily indebted farmers will be in trouble, he warns.

Brexit could be the catalyst for a new round of global instability as was seen with the Asian and global financial crises. And though the US presidential election race may be an American domestic issue it could have international consequences that excite further market volatility.

In times of downturn farmers need reserves to cope with bad times, Steed says.

"In the pre-dairy downturn a lot of our customers had 60/40 debt to equity; now they could more likely be 70/30. In others words the capitalisation of losses... is eroding their equity in their farms. In some cases their debt equity could be as high at 75/25."

Other factors could also come into play, say, a drop in land prices and a fall in the NZ dollar. Historically when the kiwi tumbles it 'falls off the cliff', Steed says. Interest rates, now buffered by the low official cash rate (OCR), also present a risk. Another cut in the OCR is forecast for August, which will set the base rate at just 2%.

Steed says to support the dairy industry all banks must hold capital reserves to cope with the risk. While some of this capital can be obtained locally, about 40% has to be borrowed offshore; the cost of this has gone up and could signal increases in interest rates.

Sharemilkers are at great risk in all this.

"They have moved from having stock worth $1800 per head to $1200-$1400 per head. These guys didn't have strong balance sheets in the first place and now many have seen their equity eroded to virtually nil.

"These are the guys I fear will be exiting the industry and yet they are important for the future. We very much want to support them and there are a couple of strategies we are adopting to do this. But gosh it is tough at the moment."