Figure 10: Dairy debt (June years)  Source: Statistics New Zealand, RBNZ. The elevated debt level means that some farmers are potentially highly exposed if there are substantial declines in the milk price pay-out, or if land prices fall. With dairy production techniques becoming more intensive and with a higher cost structure, the implied ‘breakeven’ pay-out for individual farm profitability has increased over time.
A significant decline in the milk pay-out, for example, could place some highly indebted farmers under financial strain, particularly with the market for farmland being more illiquid in times of stress. Higher debt levels mean that farmers are also exposed to rising interest rates, especially with close to 70 percent of dairy debt comprising floating rate mortgages.