NEW Zealand's dairy herd has shrunk for the first time in a decade as the end of the milk boom prompts farmers to cull cattle to cut production costs.
Global dairy prices plummeted 65 per cent in US dollar terms between February 2014 and August 2015 because of increased supply, sanctions on Russian imports and reduced Chinese demand. Prices have increased since August lows but remain well below long-term averages.
The number of New Zealand dairy cattle slipped to 6.69 million in June, according to official data - a drop of about 300,000 on the previous year and the first annual reduction since 2005.
The figures were released as the Reserve Bank of New Zealand warned on Tuesday that half the country's dairy farmers made a loss in 2014-15, prompting bank lending to the sector to jump 10 per cent to $NZ40 billion ($37 billion).
Four in five farmers are expected to have negative cash flows in 2015-16.
The central bank is concerned about banks' exposure to the dairy sector, which has undergone a rapid expansion over the past decade as farmers sought to tap into China's growing demand for milk.
Last month the RBNZ asked the five biggest lenders to the sector to stress-test their dairy loans.
A depreciating New Zealand dollar has helped cushion the sharp falls in dairy prices but the RBNZ is talking to the main banks to ensure they are making realistic provisions to reflect an expected rise in problem loans caused by sustained low milk prices.
Con Williams, rural economist at ANZ Bank, said farmers were reconfiguring their businesses to reduce production costs, which involved culling lower-performing cows and focusing on pasture rather than feed.
"This, combined with a sharp reduction in new dairy conversions has led to a fall in herd numbers," he said.
New Zealand's ministry for primary industries said on Tuesday it expected milk production to fall 7 per cent in 2015-16. But it forecasts that prices will rebound in late 2016 and early 2017 as demand increases.
The pain in the dairy sector follows a strong performance by the New Zealand economy in recent years, which enabled the government of Prime Minister John Key to balance its budget in 2015. On Tuesday the government forecast a budget deficit of 0.2 per cent of gross domestic product. But it forecast better times ahead, projecting a rebound in economic growth to 2.4 per cent in 2017, after slipping to 2.1 per cent in 2016 from 3.2 per cent this year.
The ministry for primary industries said growth in meat, wool, horticultural and forestry exports would compensate for weak dairy prices, enabling agricultural exports to increase to $NZ37.6 billion in the year ending June 2016, up $NZ1.9 billion from the year ended in June.
