Rural credit squeeze putting pressure on farmers
Rural credit squeeze putting pressure on farmers access to capital.
Dairy farmers who are currently facing the two major challenges of falling land prices alongside increasingly restrictive access to capital are being encouraged to focus on a robust budgeting process and get on the front foot with their bank manager.
Findex Head of Agribusiness Hayden Dillon said “access to funding is becoming more of an issue, despite the good payout and this is putting some farmers under pressure”
Dillon points to several factors combining to cause the credit squeeze.
Firstly, changes in OIO legislation, coupled with uncertainty about the regulatory outlook for the overall sector has led to a softening of land prices driven by low demand for dairy infrastructure, limiting exit options for both farmers and lenders.
Dillon adds: “On top of this, the RBNZ is closely scrutinising the sector as the spectre of new RBNZ regulations around capital requirements to protect the industry from a 1 in 200-year event begin to take effect,” which could increase the cost of capital as banks look to protect their margins.
“This has created an environment of increased scrutiny for farmers from their bankers” says Dillon.
Banks will move to where they see improved returns and lower risk says Dillon, “Banks are deleveraging dairy and moving towards horticulture as shown by the recent six monthly RBNZ report on financial stability, showing dairy only experiencing a 1% increase in lending while horticulture lending growth was running at 19%”.
There is a concentration of high debt positions, with 35% of dairy sector debt being held by farms who have more than $35 of debt per kilogram of milk solids.
There has also been a move away from interest-only loan structures, with banks expecting principal and interest repayments on loans, which will further limit cash availability. Dillon points out, this, along with investments into environmental compliance and rising cost of inputs such as labour and fuel, has left farmers facing a balancing act with creditors and cash flow.
With options for sale limited for the near future, Dillon is encouraging farmers to be pro-active with their lender to develop a sound repayment strategy in order to sustainably service debts, which is possible with a robust business management plan and can be developed with the help of an adviser.
“Farmers can’t afford to take a back seat in this process, otherwise they will just have to take the number the bank gives them, and we are increasingly finding adequate buffers have not been built into budgets and farmers are running short on working capital” notes Dillon.
Dillon says farmers need to be well prepared and represented when it comes to presenting financials to the bank.
“Farmers need to be engaging independent advice around their budgeting assumptions, to make sure they are realistic by ensuring there is sensitivity testing, ensuring the business can cope with changes in both income and expenses throughout the season, allowing adequate buffers when calculating how much principal they can repay each season”