Pressure is on farmers who have significant farm debt to start paying it down, while those seeking debt to purchase a new farm or expand their existing one are facing greater budget scrutiny and equity requirements from their bankers.
The shift in tone for farm lending has been a gradual one in recent years, coming in part from the greater capital requirements placed on banks after the 2008 financial crisis, and the heightened volatility experienced in rural commodity returns since then.
Many conversations between farmers and bank managers now kick off with closer scrutiny over that farm business’s ability to repay not only interest, but also debt, and over how long that will be taking place.
Part of the greater scrutiny has come from ongoing concern at the Reserve Bank about the exposure of some parts of the rural sector to debt, with dairy in particular being repeatedly highlighted by the bank.
Of particular concern has been the 20% of dairy farmers identified by DairyNZ, or about 2000 who have 70% debt over their assets. This compares to the industry average of 49% debt to asset ratio, with the average industry bank debt being $22 a kg milksolids.
Lincoln University professor Keith Woodford has been following the sector’s debt level with some concern. He traces the surge in dairy debt back to the period of rapid expansion in the industry from 2003 to 2009, leading to an overall industry debt level of $20.81 a kg milk solids.
Some tough years between then and 2016 has meant some farms have also had to accrue more debt to get through those periods, and are now under pressure to repay what was effectively short term lending.
On an industry level there is concern accessing capital, and being able to pay it back, are major constraints to the sector’s ability to meet the burgeoning global demand for high value protein products.
On an industry level there is concern accessing capital, and being able to pay it back, are major constraints to the sector’s ability to meet the burgeoning global demand for high value protein products.”
ANZ’s “Greener Pastures” report in 2014 estimated the shortfall in capital may be as great as $110 billion by 2050.
Bayleys country manager Duncan Ross said the sector is facing a combination of challenges that will prompt farming businesses to look further afield at their funding options.
Average farmer age is growing, family expectations for equitable settling on the family farm are making succession transition more challenging than it was for the last generation. And the next generation of farmers face higher operating costs through environmental compliance and standards well beyond what the last generation dealt with.
But he says it is not entirely all doom and gloom when it comes to financing options. Banks are still lending in a competitive banking environment, subject to greater scrutiny and equity expectations, and the cost of that finance remains historically low.
“Equity partnerships are one option, but there are also opportunities for investors to buy into farms through agricultural investment companies that employ skilled management on the properties.”
Enabling management to be part of the investment in the farm is also proving a more popular option for farming enterprises seeking succession solutions, or wishing to exit day to day operations.
Rural accountant and practice manager Christine Craig of Rural Accountants said in some regions alternative land uses has helped keep or even lift farm values, providing some useful head room in equity valuations, and provide potential buyers with alternative land uses.
She confirmed there remains strong competition among banks for good farming clients, and interest is there in clients able to prove strong cashflow, lower existing debt levels and sound equity.
“There remains strong competition among banks for good farming clients, and interest is there in clients able to prove strong cashflow, lower existing debt levels and sound equity.”
Vendor financing was also proving an increasingly popular option, with farmers selling out enjoying peace of mind leaving some money in the property knowing the manager also has funds invested in the business.