Bay of Plenty dairy farmers – along with fellow farmers nationwide – are being warned a strong competitor could enter the Chinese market and threaten New Zealand's dominance of dairy imports.

Reserve Bank governor Graeme Wheeler gave the warning to about 600 farmers and farming industry representatives at yesterday's DairyNZ Farmers Forum at Mystery Creek in Hamilton.

Reserve Bank governor Graeme Wheeler.

Graeme told the meeting in 2013 New Zealand supplied more than 70 per cent of China's dairy imports, but other countries are eyeing the market.

New Zealand's high market share reflects the high quality of its product, in terms of nutritional value and safety, and the marketing skills in achieving major inroads into a market others have found difficult, says Graeme.

'But other countries also produce clean milk and these producers have seen the high returns and market share that New Zealand enjoys in China.

'Some, like the US producers, are investing in whole milk powder driers. While New Zealand is likely to continue dominating global milk powder export production for many years, we should expect competitors to more aggressively target the Chinese market,” says Graeme.

'This reinforces the need for further diversification in export products and markets, including positioning for the opportunities that are expected to open up in the Indian market.”

Graeme also warnsdairy debt has almost trebled during the last decade, and currently stands at $32 billion.

'It is concentrated among a small proportion of highly leveraged farms with about half of the dairy debt being held by only 10 per cent of dairy farmers.

'Strong export earnings saw the sector's debt-to-income ratio improve between 2010 and 2012, although for the decade as a whole this ratio tracked steadily upward.”

The elevated debt level means some farmers are potentially highly exposed if there are substantial declines in the milk price payout, or if land prices fall.

However, Graeme says many dairy farmers are being cautious and using their higher net incomes to acquire additional property and undertake farm improvements without taking on new debt – and in many cases are repaying debt.

'Dairy farmers are therefore generally taking a cautious approach in the knowledge that the current high prices can turn around quickly,” says Graeme.

'This is encouraging to see, given the vulnerability of the sector and its already high debt load.”

To read the whole speech, click here.