As banks tighten their controls on farm lending, Country-Wide writers look at the options for farmers.

Terry Brosnahan

Farmers with a good business plan and cashflow are likely to be supported by banks, an independent farm lending adviser says.

Banks have tightened new lending and got tougher with existing clients. In the past farmers would ask banks for money and expect to be given it. Now they are finding it hard to get finance.

NZAB managing director Scott Wishart said banks are looking for farmers to have a plan of how to manage growth in the farm business and repay debt. If farmers do, banks are usually keen to support them.

NZAB is a financial advisory company which specialises in helping farmers deal with banks. Rural bankers used to help farmers, but now independent advice is required hence companies like NZAB.

Banks model the probability of default and the consequences of it.

Wishart said half of the model will be based on the financial accounts, the rest on human factors to support the numbers. Factors such as how good is the governance, the advisory team and a farmer’s management track record.

“Does the farmer tend to do well when things go wrong.”

He said NZAB helps clients to make decisions and protect the bank from risk.

“That will have a bearing on the probability of default.”

He said if there was a plan to pay debt back over 20 years and it made sense, banks would support it.

When farmers don’t have a plan and the business is not performing banks move to the default position – pay the loan over 20 years. Risky farmers might be charged higher interest rates.

“It brings some reality to the table.”

Farmers tended to make principal payments in the second half of the year when the milk and lamb cheques start coming in. Winter is when they would usually stop but with the recent high product prices more farmers are making monthly payments.

Aussie banks in New Zealand have been told by the Reserve Bank to hold $18 billion in assets by 2027, about twice what they normally hold.

The Australian regulator has told its banks they have too much risk in NZ dairy farming and need to reduce it. It is up to each bank how they do that.

They either stop lending, increase repayments or charge more interest.

Westpac and Rabobank have seen it as an opportunity to grow.

Wishart said the industry standard is to pay a farm mortgage back in 20 years. If farmers are making enough cash to make repayments then the banks won’t be focused on them.

If they can’t then a range of situations might happen.

He said a bank might want a non-core asset sold to reduce debt.

“As long as they are generating cash and making mortgage repayments the banks are less concerned about equity.”

Wishart said equity would become more important if the farmer wanted more money.

Farmers who are heavily in debt and relying on capital gains are the most likely to be hardest hit, especially if climatic conditions and trade disruptions such as the coronavirus continue.

There appears to be few alternatives to farmers when it comes to farm finance. Big operations may be able to access hedge funds.

Heartland Bank is not increasing its small amount of lending for farmland even if opportunities open up.

Chief executive Chris Flood said the bank doesn’t have the same cost of funds as the five major banks making it hard to compete.

“The problem is hanging on to clients when the big banks come back into the market,” Flood said.

Heartland Bank has $4.5 billion in assets of which about $650 million is in the rural sector.

Flood said the bank’s strategy was to continue sitting alongside the main bank who held the main farm loan and lend on livestock.

Leadership lacking in rural banking

NZAB managing director Scott Wishart is critical of banking leaders.

He said frontline staff were doing their best to help farmers but the directive from the top is profit margins before the long-term recovery of a farm business.

Banks know it is difficult for farmers to find alternative finance and take advantage of this.

“Rural lending in NZ is a long game and loyalty is paramount.”

He said eventually intervention was needed by regulators.

Federated Farmers is worried banks are forcing farmers to repay more back during difficult times which may only be short-lived.

Wishart said out of a dairy debt book of $40 billion, banks have $2-3b they don’t want.

The NZ Farmers Weekly reported farmers had paid back just over $1b in debt between August and December last year, the majority by dairy farmers.

Wishart said banks supported farmers during the dairy downturn when the milk payout was $3-4/kg milksolids (MS). The long-term consequence was that dairy farmers took on more debt to get through.

With milk payouts predicted to remain high for the next few years, he said the focus had to be on repaying debt so banks can support them when it drops below $6/kg MS.

Vendor finance may increase but Wishart said the problem is the lack of confidence and farm buyers.

He was told there was $500m worth of dairy farms for sale in the South Island, the equivalent of 16.5 million kg of milksolids.

“I wouldn’t think the buyer pool was a tenth of that.”

Lending tight despite profit lift

Joanna Grigg

Recent returns from sheep and beef farming may be lifting farmers’ spirits but are unlikely to herald a loosening of the lending reins.

Tim Hunt, head of RaboResearch, said “over recent seasons New Zealand has been an island of profitability in a difficult world”.

While profit margins are good, capital requirement change is a handbrake. The NZ Reserve Bank has instructed Australian banks to increase capital on hold from 10.5% of risk-weighted assets to 18% by 2027. The non-Australian banks must increase it to 16%.

Land values (described by Rabobank as inflated) are picked to ease in dairy, unless perhaps it’s a fully compliant farm in a top location.

Todd Charteris, Rabobank NZ chief executive said that like dairy land prices, sheep and beef land prices will also be impacted by a host of macro-economic factors including tighter credit availability, reduced flows of foreign capital and pending environmental change.

“We expect these pressures (for sheep/beef), but not to the same extent.”

Both types of farming have uncertainty as to the outcome of freshwater regulation changes, carbon unit price and emission regulation. Land values will vary greatly depending on the location of the farm relative to regional land and water plans, Rabobank reports.

Other factors specific to sheep and beef land values are investor interest in land for forestry conversion and pockets of existing sheep and beef land which are undervalued or underdeveloped, Charteris said.

“In some regions, we have recently seen some upward pressure on sheep and beef land prices.”

Despite these factors, Rabobank’s strategy and approach to the agri-lending market is unchanged.

Farm profitability is one of the key factors Rabobank considers in assessing a lending proposal.

“We are also looking for evidence of a clear business strategy highlighting the intended direction of the business and how this will be achieved.”

Farmers looking to borrow to add stock or buy land can be expected to supply information on business objectives/goals, financial position and history, production, succession, security and non-financial measures such as agronomic, environmental, social and workplace performance.

“We work through all of these factors on a case-by-case basis, before we make a lending decision.

“At this stage providing the bank with a Farm Environment Plan is not a mandatory part of this process, unless the farm is located in a region where they are mandatory,” Charteris said.

“Providing a Farm Environment Plan would strengthen how an applicant’s environmental performance is assessed however.”

There will always be a degree of uncertainty in regards to how incoming regulation will impact farmers, but the level of uncertainty among farmers is now particularly high, he said. This is highlighted by Rabobank’s most recent Rural Confidence Survey which found farmer confidence at net negative levels (more farmers pessimistic about prospects than optimistic) with government policy the major concern cited by farmers.

On the positive side are commodity prices, a reasonably competitive exchange rate and low interest rates are currently quite favourable, he said.