The Reserve Bank says high level of debt in the agricultural sector, particularly dairy, is one of the risks to the financial stability of New Zealand.
In its latest twice yearly Financial Stability Report, the central bank says while the financial system is sound, there are risks, one of which is the indebtedness of the dairy sector.
It says while the sector is enjoying record export prices, the level of indebtedness makes it vulnerable to a fall in commodity prices or an increase in interest rates.
The Reserve Bank says given the record forecast milk price payout, dairy farmers may take the opportunity to reduce their debt burden but there is a risk that farmers may make borrowing decisions based on the assumption of consistently high commodity prices in the future.
It is concerned this could push up prices for farm land and encourage further borrowing, which could leave parts of the sector even further exposed to a downturn in earnings.