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18 FARMERS WEEKLY – farmersweekly.co.nz – June 28, 2021
Farmer debt landscape changing Richard Rennie richard.rennie@globalhq.co.nz AS THEY locked down with the rest of the country last year during the covid pandemic, farmers were also nailing down debt levels and focusing strongly upon principal repayments. Amid this year’s buoyancy at Mystery Creek Fieldays, there was also an underlying belief among rural bankers that their clients’ spending spree comes as debt levels lower and balance sheets strengthen. Latest Reserve Bank data on the rural lending to the end of March this year indicates the sector holds $60.5 billion in debt, down 1.6% on the same time a year ago, and expected to fall further in the coming season as strong commodity prices boost early season cashflows. ASB’s head of business banking Tim Deane says there has been a complete shift in attitudes of farmers to debt, with expectations principal payments will be included from the start in farm loans and interest-only loans largely in the past. Interest-only repayments on large farm business loans became commonplace through the mid2000s for several years, coinciding with double-digit capital gain values on dairy land in particular, pushing that sector to record $41b in debt in November 2018. “We are seeing farmers embracing principal repayments, and they understand a strong balance sheet means a more resilient business and ultimately
that means they will be in a position to make the most of opportunities as they come along,” he said. Deane was adamant ASB had not shut shop in lending despite more debt being repaid and farmers with good equity levels were exercising their ability to take on new farm businesses. “Our criteria for equity has not shifted much, we have been remarkably consistent and will definitely say no if the equity position is too low, or if cashflow will put too much pressure on the business,” he said.
We are seeing farmers embracing principal repayments, and they understand a strong balance sheet means a more resilient business and ultimately that means they will be in a position to make the most of opportunities as they come along. Tim Deane ASB Acknowledging the tendency of the dairy sector to capitalise stronger cashflow value into land value capital gains, Deane says this has been far less apparent now. “We have seen a significant lift
in dairy payouts, but dairy farm prices have remained relatively stable. People are increasingly focused upon cash flow, production, rather than farming for capital gain,” he said. ANZ’s managing director for business Lorraine Mapu says farmer clients were recognising the capital demands likely to come in order to comply with sustainability demands, driven by regulatory bodies and consumer expectations. “This could result in fewer cows, maybe lower output, so you need to have some headroom in your balance sheet for these requirements,” Mapu said. Her lending staff were also seeing greater interest among farmers in diversifying their farm business, incorporating kiwifruit, for example, into a dairy farm operation. A tool ANZ uses for mapping the farm’s spatial layout can highlight opportunities that not only provide an additional income source, but help mitigate the property’s overall nutrient footprint. “In terms of succession, we are also seeing the younger generation of farmers managing to bring their older generation, maybe their parents, along with them when it comes to looking at opportunities and considering sustainability,” she said. Mapu’s experiences are in sharp contrast to those her predecessor Mark Hiddlestone shared with Farmers Weekly at Mystery Creek two years ago. At that stage dairying was emerging from the
PULLED ALONG: ANZ’s Lorraine Mapu says the younger generation of farming clients is drawing the older along the sustainable pathway.
hangover of high debt, tough climatic conditions and lower payouts from 2014 until then. The bank was moving then to reduce its exposure to the rural market, which reached a historical high of 36% some years earlier. Today that share sits at about 27%. The ANZ commodity price index is now at an all-time high, having experienced eight consecutive lifts, up 1.3% to the end of May, and coming despite a
1% firming in the NZ currency. Chief executive Todd Charteris says Rabobank was sharing a similar reduction in interest-only loans, with significant portions of principal being repaid. He says Rabobank was working hard on behalf of its clients who were struggling to source staff. “We have engaged with the Government where we can to provide some background and views from on the ground about this challenge,” Charteris said.
High prices across sector drive up index Richard Rennie richard.rennie@globalhq.co.nz WITH the new farming year kicking off, high commodity prices are continuing to push positive views from analysts on the new farming year’s prospects. Speaking at Mystery Creek Fieldays, ANZ commodities analyst Susan Kilsby says the strength lay across the board, with the exception of wool, and has pushed the bank’s commodity
price index to an all-time high. “Logs are the only commodity actually at their highest point. The other sectors are not at their peak, but rather it is just that all sectors have combined at the same time to be close to their peaks, driving the entire index up,” Kilsby said. Log prices have increased by 25% on a year ago, with China driving demand just as global supplies of exported logs have tightened.
RECORD: Susan Kilsby says a combination of historically high prices for all commodities has pushed the ANZ Commodity Index to its highest point ever.
Up to May, the ANZ’s commodity price index had experienced eight consecutive increases, with the last one in May jumping 1.3% month-on-month. Underpinning the increases is a steady lift in oil prices since the global pandemic’s peak, rising from US$42 a barrel in November to US$73.53 this month. In the primary sector grain prices have experienced major surges in value, with wheat increasing from US$229 a tonne in March to US$278/t. Corn prices have lifted 19% from US$257/t in March to US$305 in May. This has been largely driven by China’s efforts to restock its devastated pig population, recovering from the impact of African swine fever. “They have a less efficient pig population, with stock that may not have normally been kept, requiring more feed per kilo of pork produced,” she said. The Chinese pork industry is undergoing changes similar to what the dairy sector has undergone, with multiple smaller operators exiting the industry, and large European-style pork farming systems being installed to help improve productivity and reduce disease risk. The trade war with the United States and the impact of covid
on food supply lines has resharpened China’s awareness of its inability to completely feed itself, with the country doubling down on efforts to expand its production capacity.
There has also been a lot of talk about China growing its milk supply. I keep going back to the fact they do not have enough land and face constraints. Susan Kilsby ANZ However, Kilsby cautioned that New Zealand processors were facing real and lingering constraints to production that were taking the cream off what could be even higher returns. Global shipping costs have rocketed, while container supplies particularly for refrigerated units have been in dire shortage. Globally, she says milk supply growth has been slowing, with increased environmental considerations affecting much of the world, with the exception of
South America. “There has also been a lot of talk about China growing its milk supply. I keep going back to the fact they do not have enough land and face constraints,” she said. There is no cheap shipping for importing feed. The days of cheap backloading are gone.” In the meantime, she doubts efforts by NZ to stop live trading in dairy cattle to China will significantly dent the country’s efforts to improve genetic stock, with stock likely to be sourced from Australia and Uruguay in future. In coming years, she anticipates there will be more specific price signals paid to farmers for red meat supplies, reflecting the carbon footprint of rearing stock to certain ages. “It is likely to be a bit like what the dairy companies are doing where they pay a premium for meeting certain targets,” she said. “Sheep and beef are a bit further behind, and the longer-term trend is likely to be linking consumers’ needs to what is happening on-farm in the form of a more contracted supply agreement. Processors will have to price in at some point the emissions for different aged livestock. There is little incentive to do so at this point.”
