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Farmers being hit hard by policy and regulation changes


A capital crunch is starting to impact farmers with banks increasingly cagey about lending to dairy and the sheep and beef sectors, which is putting huge pressure on the industry, according to Findex’s Head of Agribusiness, Hayden Dillon.

Dillon noted things are looking okay externally. The macro story for our safe, efficiently produced protein is still very strong, evidenced by good commodity prices. But there are three domestically-sourced drivers which have converged to create significant difficulties for farmers, particularly those with high levels of debt or who are seeking capital to grow.

The first reason is changes from the Overseas Investment Office. Dillon explains “The changes have had an impact on the value and demand of land meaning we do not have the foreign capital coming in for the largest part of our farming business, being sheep, beef and dairy and our productive assets there. This has had a flow on effect, being a lack of capital into the market, halting the domino effect of down-stream, farm sales taking place, and the obvious decrease in confidence meaning the largest farms just cannot sell, as they have no market, externally, or domestically as the banks have closed to these borrowers.”

The second reason is the collection of various government polices and statements surrounding legislative changes. Dillon expands, “there are the unknowns around the Emissions Trading Scheme and the impacts and costs that could be associated with that, in conjunction with increased regulation and compliance as farmers are already working through their environmental plans, while also struggling to retain and attract staff, as visas are becoming harder to secure, and a longer process. These all have impact on the value of the farms as they directly affect productivity and cash flows.”

Lastly, the Reserve Bank of New Zealand’s (RBNZ) approach is heavily impacting farmers. The first being the banks proposal to increase capital requirements on trading banks. Banks have made it clear it will negatively impact them and they will pass on any increase to farmers. Dillon comments “Economists have already outlined how negatively the economy will be affected through reducing GDP, no one is quite sure what the RBNZ is talking about when they discuss the ‘1 in 200-year event’, or indeed the need for such a sudden pace of change.”

In addition to the capital requirements the RBNZ are also taking a very strict approach with the banks regarding lending policies, ensuring a far higher level of compliance to their approved lending policies. “This is catching farmers out when they are going in to ask for additional capital, and while they think they are okay, because their equity reflects that, or they have been paying principal, they are getting a surprise to find that technically they are out of the banks criteria and cannot access any more capital”. Dillon explains, “again, it’s the pace and aggressiveness with which the banks acting that is catching many farmers out.”

This is severely impacting farmers ability to borrow to invest in development, and acquisitions. The irony being that farmers are being asked to invest more in new systems and technology, in order to reduce their carbon footprint, but are being limited due to an inability to access new capital.

A strong functioning banking system is critical for farmers, and the wider NZ economy. The slow creep of these related issues is going to have an impact well beyond just the farmers. It will create a flow onto the regions and further. “I am not sure if the policy makers have connected the dots and realised that these are all coming together and creating major issues” Dillon comments.

To try and combat this situation, Dillon urges farmers to be proactive, “don’t assume that because you haven’t heard from your bank that things are okay, go into your bank and have the discussion to understand where you sit from a credit position.”

If farmers are looking at starting a new project they will need a far higher level of financial rigour around their application. They need to be engaging independent advice around their budgeting assumptions and will need at least a 5-year detailed cash-flow plan to showing their ability to service debt. Banks are not fussed on interest only and this will mean making allowances for things like tax and principal repayments.

“The silver lining in all this, as always, is even when things are depressed there are still opportunities for those that can provide the high-quality information, and proven track record. Understanding the true value of the assets and the risks, is critical to taking advantage of any opportunity.” Dillon concludes.


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