Wednesday, March 20, 2024

Bank plans put pressure on farmers

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The Reserve Bank dropped the Official Cash Rate to 1% on August 8 but the effect will take a long time to show up in reduced farmers’ interest rates, if ever. Hugh Stringleman looks at the background to the shifting balance between farmers and their financiers.
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The Reserve Bank proposal to increase the capital requirements of trading banks has put more pressure on farmers for debt repayment and made loans harder to get.

The changes in borrowing policies and much more restrictive foreign investment rules have already affected farmland sales and purchases, real estate agents say.

The major Australian-owned trading banks have been accused of scaremongering in advance of the proposed capital rules and leaning on farmers prematurely.

Reserve Bank governor Adrian Orr said the banks had been aggressive in lobbying and scaring the public, particularly in the agriculture sector.

While the banks have warned of substantial impacts on their margins, Orr said the proposed rules will trim only 0.2%.

ANZ chief executive Shayne Elliott said he will review the bank’s size, nature and operations in NZ if the rules are applied.

Associate Finance Minister Shane Jones visited the ANZ head office in Melbourne and said he received the strong impression banks will pass on any extra costs to their customers.

And the farming community will bear the brunt of any changes.

The Reserve Bank’s intention to review the capital adequacy framework followed regular expressions of concern about high dairy industry debt.

In financial stability reports it said dairy debt is one of three key risk areas for the NZ financial system.

In its May update RBNZ said 35% of the $40 billion debt in the dairy sector is held by highly indebted farmers with debt of more than $35/kg of milksolids.

“On average, these highly indebted farms require a milk price of $6.20/kg MS just to break even and Fonterra is forecasting a range of $6.30 to $6.40 for this season.”

Strong prices and production have allowed many farms to make progress in repaying debt and the proportion of dairy loans on principal and interest terms continues to increase.

“Banks have so far taken a long-term view in supporting stressed dairy farms and working with them to strengthen their financial positions.

“But given its high debt levels the dairy sector is susceptible to higher interest costs or working expenses and to changes in banks’ business practices,” the RBNZ said.

Vulnerable farms must reduce their debt to improve their resilience to future downturns.

However, options for addressing problems at financially stressed farms appear constrained as demand for dairy farmland is low.

The Reserve Bank’s sector lending figures show agricultural debt has continued to increase over the past year, particularly for horticulture, and growth in dairy debt has slowed but not yet reversed.

Federated Farmers’ latest banking survey of its members shows satisfaction with their banks remains strong but the satisfaction level is declining.

It dropped from 74% to 71% over the previous six months and was the lowest since 2015, when the biannual survey series began.

The average interest rate being paid now is 5%, down 0.1% from the previous survey. But the average rate for dairy farms has increased slightly.

Most farms, 85%, have an overdraft, averaging $225,000, with a 7.4% interest rate, a level that has hardly moved since the survey began.

Members reported a substantial increase in perceptions of bank pressure, with one in five dairy farmers feeling under pressure.

The average mortgage of all farms with one is $3.75m and the average for dairy farmer’s is $4.8m.

Sharemilkers have an average $1m of borrowing and they pay an average 5.3% interest rate.

There has been a reduction in the average rate charged over the past four years, down from 6% to 5%.

ANZ has 35% of farmers’ business, Rabobank 20%, BNZ 18%, ASB 16% and Westpac 11% while 19% of farms have no mortgage .

One in four farmers reported a change in conditions from their banks over the previous six months. Examples included interest rates, margins, shifting from fixed to floating interest rates or vice-versa and more information or security required.

“This is consistent with banks wanting farmers to pay down debt after supporting them during the 2014-16 dairy downturn and also consistent with banks moving to implement the Reserve Bank’s proposed changes to bank capital requirements.”

Federated Farmers also submitted to the Reserve Bank on its capital review, saying it is anxious about the potential increases in lending rates and tighter credit conditions.

It notes the estimated total cost of the proposed requirements to the banking sector will be about $20b.

While the RBNZ estimated the effect of bank margins to be between 20 and 40 basis points other estimates by KPMG and UBS were more than 100 basis points (1%).

The federation was concerned the impact could be higher on riskier sectors such as agriculture.

“For farmers an increase in costs along the lines of the Reserve Bank’s modest estimate would be unwelcome enough while the worst-case scenario would be devastating.”

It called for more modelling by the RBNZ and if it is to go ahead with the higher capital requirements that a transition period be used to mitigate any unreasonable costs on bank customers and the economy.

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