Squeezed cashflows rather than any exuberance among farmers about their financial outlook is likely to be behind the fastest growth in agricultural lending in nearly four years, says a rural finance broker.
Latest figures from the Reserve Bank show agricultural lending rose at an annual rate of 1.4% in May – its fastest pace of annual growth since October 2019.
The annual growth rate for lending to the sector turned positive in December last year, breaking 31 successive months of declines dating back to April 2020.
Lending growth remains well shy of the 20% and more annual growth rates of the early and mid to late 2000s, when easy bank credit supercharged rural land values.
Rural finance broker NZAB’s managing director Scott Wishart said the lending recovery did not portend a return to those boom times.
Rather it was entirely consistent with recent farmer surveys showing increasing financial stress.
Wishart said in recent years the annual rate of lending growth had been supressed as farmers used surpluses to pay down debt.
In all, $1.9 billion had been paid back between July 2019, when total agricultural debt peaked at $63.9bn, and December last year, when it began to rise again.
However, with interest rates now rising and incomes falling, surplus cash for principal repayments has dried up and debt is on the way back up.
“In many cases from the start of last year to now farmers interest rates have tripled,” Wishart said.
“That is pretty significant in terms of cashflow that would otherwise have been used for debt repayment.”
Reserve Bank figures show the total of agricultural loans paying both interest and principal was $13.1bn in October 2021 when the central bank started the current cycle of Official Cash Rate hikes. That number had fallen by $1.7bn to $11.4bn by May this year. Dairy farms made up most of that fall with P&I loans falling by $1.2bn to $6.6bn.
Wishart said while there were signs on-farm inflation was easing, these gains had been swallowed up by the rise in interest costs.
“We are seeing some of the cost pressures begin to come off for dairy farms in particular.
“From the budgets we started doing for this season back in December and January we have probably seen cost structures come back by 50 or 60 cents per kilo of milk solids primarily on reduction in fertiliser and feed costs.
“But unfortunately that has been more than offset by increases in interest costs and reduction in payout.”
Wishart said his dairy clients on average had budgeted 90 cents per kilo of milk solids for interest payments last year but had ended up paying $1.65 per kilo on average as interest rates climbed relentlessly higher.
“The budgets for this year are as high as $2,” he said.
Wishart said the financial squeeze is being compounded by high terminal tax payments, which in many cases will need to be paid out of this year’s lower income. Provisional tax payments based on last year’s higher income will also put further stress on balance sheets.
“We are seeing that double whammy in tax coming through at the moment,” he said.
“So even though the forecast is looking like a break-even [for dairy farmers] for the year ahead there are still some pretty significant tax bills that have to be paid.”
On the upside, Wishart said because interest rates for most rural loans are either floating or fixed for short terms, when the OCR does fall the relief for farmers will be immediate or near to it.
Furthermore, while there are signs of increasing stress for agricultural borrowers, those actually in default of their loans remain at historically low levels.
Agricultural loans classified as non-performing – defined by the Reserve Bank as impaired or in default of their loan terms for 90 days or more – had increased to 1.1% at the end of March.
That’s up from 0.9% a year ago but well below the 1.5% of loans deemed to be non-performing during a period of weak commodity prices in 2016 and the historic high of 4.4% during the 2011 dairy slump.