Wednesday, April 24, 2024

Farmer debt landscape changing

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As they locked down with the rest of the country last year during the covid pandemic, farmers were also nailing down debt levels and focusing strongly upon principal repayments.
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Amid this year’s buoyancy at Mystery Creek Fieldays, there was also an underlying belief among rural bankers that their clients’ spending spree comes as debt levels lower and balance sheets strengthen.

Latest Reserve Bank data on the rural lending to the end of March this year indicates the sector holds $60.5 billion in debt, down 1.6% on the same time a year ago, and expected to fall further in the coming season as strong commodity prices boost early season cashflows.

ASB’s head of business banking Tim Deane says there has been a complete shift in attitudes of farmers to debt, with expectations principal payments will be included from the start in farm loans and interest-only loans largely in the past.

Interest-only repayments on large farm business loans became commonplace through the mid-2000s for several years, coinciding with double-digit capital gain values on dairy land in particular, pushing that sector to record $41b in debt in November 2018.

“We are seeing farmers embracing principal repayments, and they understand a strong balance sheet means a more resilient business and ultimately that means they will be in a position to make the most of opportunities as they come along,” Deene said.

Deane was adamant ASB had not shut shop in lending despite more debt being repaid and farmers with good equity levels were exercising their ability to take on new farm businesses.

“Our criteria for equity has not shifted much, we have been remarkably consistent and will definitely say no if the equity position is too low, or if cashflow will put too much pressure on the business,” he said.

Acknowledging the tendency of the dairy sector to capitalise stronger cashflow value into land value capital gains, Deane says this has been far less apparent now.

“We have seen a significant lift in dairy payouts, but dairy farm prices have remained relatively stable. People are increasingly focused upon cash flow, production, rather than farming for capital gain,” he said.

ANZ’s managing director for business Lorraine Mapu says farmer clients were recognising the capital demands likely to come in order to comply with sustainability demands, driven by regulatory bodies and consumer expectations.

“This could result in fewer cows, maybe lower output, so you need to have some headroom in your balance sheet for these requirements,” Mapu said.

Her lending staff were also seeing greater interest among farmers in diversifying their farm business, incorporating kiwifruit, for example, into a dairy farm operation.

A tool ANZ uses for mapping the farm’s spatial layout can highlight opportunities that not only provide an additional income source, but help mitigate the property’s overall nutrient footprint.

“In terms of succession, we are also seeing the younger generation of farmers managing to bring their older generation, maybe their parents, along with them when it comes to looking at opportunities and considering sustainability,” she said.

Mapu’s experiences are in sharp contrast to those her predecessor Mark Hiddlestone shared with Farmers Weekly at Mystery Creek two years ago. At that stage dairying was emerging from the hangover of high debt, tough climatic conditions and lower payouts from 2014 until then.

The bank was moving then to reduce its exposure to the rural market, which reached a historical high of 36% some years earlier. Today that share sits at about 27%.

The ANZ commodity price index is now at an all-time high, having experienced eight consecutive lifts, up 1.3% to the end of May, and coming despite a 1% firming in the NZ currency.

Chief executive Todd Charteris says Rabobank was sharing a similar reduction in interest-only loans, with significant portions of principal being repaid.

He says Rabobank was working hard on behalf of its clients who were struggling to source staff.

“We have engaged with the Government where we can to provide some background and views from on the ground about this challenge,” Charteris said.

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