11 May 2011

The Reserve Bank’s latest Financial Stability Report accords with Federated Farmers view that improved commodity prices will not rapidly translate into economic activity.

“The Financial Stability Report should be compulsory reading by councils and policy makers because it spells out the priority for agriculture - repairing farm balance sheets,” says Philip York, Federated Farmers economics spokesperson.

“Councils and Government need to be extremely cautious about adding new or increasing current compliance costs.

“Farm debt remains high historically in proportion to output, but has noticeably fallen back in recent months. As the Reserve Bank notes, ‘agricultural credit has slowed from growth rates of near 20 percent a few years ago to essentially zero today’.

“The root cause of our problem goes back to the international Basel II capital framework. A few years ago, this saw the Reserve Bank let the four major trading banks set their own capital adequacy model.

“Look at it like this, in just 20 months farm debt expanded by 31 percent from $35.9 billion in January 2008, to some $47.1 billion by August 2009. The ramification of this rapid loosening will probably be felt for the next five years as farm balance sheets are repaired.

“Federated Farmers has been speaking to the Reserve Bank with regard to its emerging policy on capital requirements for farm lending. We recognise the need for prudence, but there is a need to avoid going from one extreme to the other. It’s about balance.

“While farm debt peaked at $48.2 billion last September, its fallen back to $47.4 billion with a downwards trajectory.

“In my view the rural property market will remain subdued as farmers focus on production and reducing debt as part of prudent business management.

“For councils, Federated Farmers message is to be aware of farm businesses very tight financial position with rates, fees and charges. Yes, commodities are very positive but the prime beneficiary of this will be the banks as farmers pay down debt.

“It’s the same message to Government and reinforces the need for it to show restraint in the Budget next week. Every dollar in new compliance means less money to boost production and exports our economy needs,” Mr York concluded.

ENDS

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