Bayleys Canterbury Country Collection Edition 3 2019 | Page 9

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. 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.
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. “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.”
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. 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.
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. 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.
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. 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.
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.
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.
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.
Source: bayleys.co.nz/rural-insight