Lenders to be made to mediate with indebted farmers on the cusp of going under

Rural News

Lenders to be required to mediate with indebted farmers who default on payments before taking enforcement action under proposed law thought-up by NZ First and taken-up by the Government

17th Jun 19, 5:23pm by Jenée Tibshraeny

The Government has outlined plans to pass a law to help indebted farmers deal with their lenders.

Cabinet has approved the Farm Debt Mediation Bill, which if passed, will require creditors to offer farmers who default on payments mediation before they take enforcement action.

Under the Bill farmers and creditors have up to 60 working days to complete the mediation process, unless both parties agree to extend it.

If a lender doesn’t want to partake, the farmer will be able to apply for a Prohibition Certificate, which will restrict the lender from taking any enforcement action for six months.

Farmers will also have the ability to request mediation with their lenders at any time, via the scheme.

The Ministry for Primary Industries will administer the scheme. Each mediation is expected to cost $6000. This fee will be split between the lender and farmer.

Both Federated Farmers and the New Zealand Bankers’ Association support the Bill.

Asked in a post-Cabinet press conference why farmers deserved special treatment, and why there wasn't a debt remediation scheme for the construction sector for example, both Prime Minister Jacinda Ardern and Agriculture Minister Damien O’Connor spoke of "some very specific circumstances that relate to our rural sector".

They said farmers were especially vulnerable to business down-turns as a result of conditions often outside their control, like weather, market price volatility, pests and diseases like Mycoplasma bovis.

“The failure of a farm business can lead to the farmer and their family losing both their business and their home. For many rural communities the failure of one farm can have a ripple effect through those communities and the regional economy," O'Connor said.

He also noted situations where farmers had been forced to sell-up when they were cash positive, but the equity of their properties had gone down.

Ardern said farmers could face a "David and Goliath" scenario when going up against their banks, so the scheme would bring some "balance" to the situation.

O’Connor pointed out total farm debt in New Zealand is $62.8 billion – up 270% on 20 years ago.

“Farmers who operate a family business often don’t have the resources to negotiate their own protections when dealing with lenders. That’s where this piece of legislation fits in," he said.

“The Bill is pragmatic. The guts of it is early intervention – where either the farmer or the bank have an ability to go and seek mediation, which is a far better option than forced foreclosure."

Ardern wouldn't comment on what she thought of the Reserve Bank's proposal to require banks to hold much more capital - a move that's expected to see banks reduce their lending to higher risk customers like farmers.

Both Ardern and O'Connor thanked NZ First for being the brains behind the Bill. It was initially a private members bill in the name of NZ First MP Mark Patterson.

Further to the matter of farm debt mediation being in the Labour/NZ First Coalition Agreement, the Government has decided to rework the Bill and introduce it as a government piece of legislation.

The mediation scheme will apply to farm businesses engaged in agriculture, horticulture, or aquaculture. It will also apply to farm businesses engaged in any primary production activity done in connection with these.

The scheme will apply to loans that are secured against farmland, farm machinery, livestock, and harvested crops and wool.

It doesn't cover debt linked to lifestyle farms, forestry, wild harvest fishing, and hunting or trapping of animals.

The public will have the opportunity to have a say on the Bill as it goes through Parliament. It is expected to be passed before the end of the year. The scheme is expected to be operative by October 1 2020.

See this MPI page for more information.

Rural debt

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Source: RBNZ

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32 Comments

by Joe Wilkes | 17th Jun 19, 7:12pm 1560755542

I do find it amazing that this issue can present itself so soon after a peak in prices of almost all agricultural product prices. I would have thought that the expression 'saving for a rainy day' would have been one that at least those in farming would understand. The chart to look at here is the % change in credit growth tab above. A sharp spike in the pace of credit growth in 2014-2016 and then the subsequent decline in 2017, 2018 is why the stresses are now building in the farming sector and also why rural land prices are falling in many areas and the available equity to borrow against reduced. Similar to housing in Auckland, the pace of debt accumulation appears to be what was holding it all up. The reduction in the pace in 2017 and subsequent flat-lining since has been enough for rural asset prices to fall.

It will be interesting to hear what the sales of trucks and machinery were like at Field-days this year. I have heard of one brand of vehicle seeing sales at the event this year down by 40% on last year.

by Retired-Poppy | 17th Jun 19, 7:27pm 1560756445

Joe, well said. With the backdrop of declining security, more farmers are grappling with being starved of much needed capital. Its challenging running any business whilst having one's profit margin wiped out by compliance costs and interest. There is only so far cost cutting can go before no option but to sell up and walk.

by Davo36 | 18th Jun 19, 12:26am 1560774383

Joe, some years ago, the price for milk solids was much higher. Around $8.30 per kg. And the story was along the lines of "There's 1.4 billion Chinese people who are getting wealthier and they all want more protein and more high value products - so we can't lose!"

And so many farms were converted to dairying on that basis. But then the milk price tanked. Why? It was a totally unforeseeable couple of things:

1) Putin invades Crimea. So then we stop selling milk powder to them, and so do other westernised countries. And so there's a glut of milk powder on the market.
2) It turned out China had huge stockpiles of milk powder, and didn't need to buy any more for quite some time.

And in the meantime other countries production has gone up.

Oh and of course Fonterra has been managed into the ground. Meaning much less returns to farmers than there should have been.

by Belle | 18th Jun 19, 10:03am 1560809007

Davo, just to add....I well remember a rumour went round from Landcorp that a kg ms was heading to $10 and beyond. I have no idea if it was genuinely from Landcorp but it was from one of their upper echelon managers.
There was so much confidence. And you know a market of 1.4 billion does sound really good.
Plus the governments of the day, both nats and labour were very gung ho.
Banks were pressuring those with equity to dig a deeper hole.
Funny the only one with any sense was Winny. Admittedly it was later in the day. But he came out swinging saying Fonterra was rooted. The dairy market was rooted. Just before it all keeled over. I think he picked the $4 kg ms well before the banks and farmers entertained the idea.
I caught up with a friend I hadnt seen for a few years a couple of weeks ago. He had just bailed out this May. His impression from a longterm sharemilking point of few was that dairy was pretty buggered for a while.
Most of us who stayed on the sheep and beef side of the fence always wondered how they were ever going to extract enough milk from the old biddies to pay for ...everything....the infrastructure of a dairy farm is so complex. Turns out we were right. Its tough enough making money out of meat

by Kate | 17th Jun 19, 8:19pm 1560759576

Excellent. This is coalition politics at its best. Mark Patterson is one to watch - his maiden speech was really worth reading;

https://www.parliament.nz/en/pb/hansard-debates/rhr/document/HansS_2017…

by Davo36 | 18th Jun 19, 12:22am 1560774138

How can propping up failing businesses be a good thing?

Surely we have to let them fail and be replaced (or newly managed) by more competent people?

If I open a shoe shop, and it goes under, the government doesn't help me with my creditors now do they?

by Withay | 18th Jun 19, 5:39am 1560793182

These interventions are pushed by the same people who then say the free market has failed when things get out of whack. Such a lack of foresight is staggering.

by skudiv | 18th Jun 19, 6:34am 1560796461

I wish the banks would just foreclose on these properties and let the Chinese buy them at firesale prices, they are much better stewards of New Zealand.

by Belle | 18th Jun 19, 9:46am 1560807984

I am hoping that was laced with sarcasm Skudiv. I have some personal insight to the chinese farms. Its not good.

by Nzdan | 18th Jun 19, 4:59pm 1560833948

Skudiv tried dairy farming once. Couldn’t handle it so threw in the towel.

by Kate | 18th Jun 19, 6:45am 1560797118

It's hardly "propping up" - it's the government regulating the finance sector. In light of the economic and social disaster that sector in the US wrought on residential home owners during the GFC, such regulation is imminently sensible.

by Withay | 18th Jun 19, 7:05am 1560798359

The regulation should affect before the mortgage is issued. That’s the time for effective regulation, not after. If you do it after, you get unintended consequences.

by Pragmatist | 18th Jun 19, 8:41am 1560804080

That horse bolted a while ago....

by Withay | 18th Jun 19, 10:15am 1560809729

You still have to fix it otherwise we will just continue down the spiral. A big part of why we have so many issues socially and economically at the moment is we don’t fix the cause, only the symptom.

by linklater01 | 18th Jun 19, 9:57am 1560808627

Kate,

But what makes farmers such a special case? If I ran a small business employing 20/30 and had borrowed to expand,perhaps on the strength of a price for my product that proved unsustainable,would I be given this treatment? We both know the answer to that.
To me,this is a purely political move and I think I see Winston's hand operating the lever.

by Kate | 18th Jun 19, 10:43am 1560811416

If there was an impending SME debt crisis, a good government would address the issue. The debt crisis in agriculture is in many cases the result of poor earlier management of the sector with respect to environmental issues. With the addressing of those environmental issues has come increased debt. It is only reasonable that the government improves regulation of the finance sector in the interests of the environment.

by linklater01 | 18th Jun 19, 5:05pm 1560834339

Kate,

I am all for better regulations of the finance sector. The list of bad practices by banks globally is depressingly long and all too few of those at the top are made to pay a proper price. I am afraid that when the next crisis hits,then once again,debt will be socialised.
But the farming model baffles me. I have no connections to farming,but spent my life in the financial sector in Scotland. What other industry works on the basis of such a poor return on capital employed,while 'banking' on substantial tax-free gains to make it work?

by Kate | 18th Jun 19, 6:40pm 1560840041

Well yes but it was the banking fraternity that allowed/promoted this - wanna buy a new farm, no worries, we'll revalue your assets and it won't cost you a dime.

by Sluggy | 18th Jun 19, 4:23am 1560788592

If the govt is going down this line surely it should encompass all SME's not just one sector.

by The_4th_estate | 18th Jun 19, 7:30am 1560799821

From my perspective the entire primary sector needs protecting from itself and this is a good step in that direction. Farmers in this country are well known to be wildy unsophisticated in their business approaches and if it wasn't for the existance of corporate behemoth Fonterra, as bad as it is currently performing, the dairy sector simply wouldn't function. The financia sector is well aware of the lack of business acumen in the farming sector and exploits it ruthlessly. The white gold era saw where the entire sector lured into thinking they could access endless payouts at levels far higher than historic norms suggested was ever possible simply by borrowing vast amounts of capital, converting to dairy and selling everything they made to one uncertain emerging market. Sounds prudent doesn't it. Long story short, the farming sector is awash with debt and virtually in distress as a consequence of a bitterly short lasting peak in high payouts ( surprised? being a commodity why is anyone surprised by that happening?) Of course the banks are not sad, they'll set about liquidating the vulnerable debtors many of who will be small family farms and the nett result will be the complete corporatisation of the farming sector and mission accomplished for the financislists.

by waymad | 18th Jun 19, 11:41am 1560814916

The assertion that "Farmers in this country are well known to be wildy [sic] unsophisticated in their business approaches" is pure generalisation. The days when anyone in buisness could run their show with reference only to the bank statement and the chequebook have been gone for decades. It's a rare ag business that does not have monthly full financials on tap, fert, pasture and nutrient budgets on Overseer, inventory and genetics in Minda, and their financiers fully up-to-date on the state of play.

As some more nuanced commenters have - er - Commented - much of the debt is down to compliance, Elfin Safety, environmental improvement, and the usual fixed-asset trade-ups - robot sheds and feed lots, sewage systems, cut-and-carry feed machinery, and so on. This is always debt-funded: ever since the first freezing companies (overseas capital all) started filling in the links in the value-adding chain.

To be sure, there has been some over-optimism in terms of market prospects and prevailing prices. But then one could say that about apartments in CBD's, about suburban McMansions, and don't let's get started on the tendency of urbanaites to sh*t into the nearest river or beach every time it rains.....because Rates are So High and Infrastructure is Expensive. Well, the farmers are doing something about their end of things......and matching asset life to financing period. Now if only Urban Types could do the same....

by Kate | 18th Jun 19, 12:12pm 1560816739

One area that most/many council's actually have and are addressing is out dated wastewater treatment facilities. Certainly in Palmy where we used to live, I submitted on their failure to prioritise that expenditure year after year after year to their LTP/AP consultation. Finally, Horizons took them to court - good on Horizons. But this failure of RCs to enforce conditions on consents is widespread and happily I see that changing... finally.

by waymad | 18th Jun 19, 12:31pm 1560817907

But then there's that tendency for RC's to roll over 'consents to discharge untreated....' into the nearest waterway, for their City Council, for the next few decades, because Infrastructure Expensive. And without public consultation because Precedent.

Boo-hoo.

Walk that talk first, lecture rural types only once we can swim in the Avon, the Heathcote, and on any Awkland beach, at any time of our choosing.

by Kate | 18th Jun 19, 12:50pm 1560819024

Agree - but point is, we need to keep pressure on RCs to clean up everyone's act. That's what they are there for.

by redcows1 | 18th Jun 19, 5:47pm 1560836870

Perhaps you missed the Queenstown lakes district council application for a 35year (maximum allowable) consent to discharge waste effluent etc whenever. At least they're now applying for one so will get a bit of scrutiny previously they never bothered.

by Kate | 18th Jun 19, 6:48pm 1560840500

I read about it and question the need for a consent, based on what they are saying the reason for it being needed (i.e., to 'permit' accidental/unforeseen blockages causing overflows). Liability for such unforeseen accidents are dealt with under s 341. As I read it, on the basis of their own reasoning, the consent should not be granted as it is unnecessary.

by redcows1 | 18th Jun 19, 9:55pm 1560851728

Is it unforeseen when it happens 200 times in 3 years? And when it's not caused by severe weather.

by Kate | 19th Jun 19, 6:38am 1560883086

The report I read said 4 times a year on average.

by The_4th_estate | 18th Jun 19, 9:37pm 1560850638

Bollocks. Case in point, MPI are at their wits end trying to contain Mbovis due to widespread refusal of farmers to engage with the NAIT scheme. You don't want to comply or complain about compliance costs? Most of it exists so your industry is protected from its own stupidity. The law is not optional or though the cowboys think it is. Share milker contracts, stock sale contracts, worker exploitation the list goes on.

by redcows1 | 18th Jun 19, 9:59pm 1560851983

In reply to NAIT only. I'd assume you've never used it, it's a absolute dog. Totally unsuitable unusable and not fit for purpose.
I'll give you the rest just don't blame farmers for that one.

by Wilco | 18th Jun 19, 1:07pm 1560820057

This step will allow farmers time to seek help BEFORE the farm is sold.
It is easy to generalise about who's to blame for excessive farmer debt but in some cases both farmers and bankers are to blame.
It is important that the consequences be shared fairly.
Unfortunately the power in the relationship is all the bank's.
It has been too easy to sell the farmer up and then use the legal system to delay and defer for years until a farmer has generally lost faith or hope.

by waymad | 18th Jun 19, 2:13pm 1560823998

Well put, Wilco. It's the all-too-common Demonisation of the Other that infests social media, leaking into these threads as evidenced by the some of the comments here.

The rural sector, taken broadly, supplies about a quarter of exports, and provides part of the environment gazed upon by the tourists who contribute another substantial export chunk. So this is a quite different issue, when considering the mediation proposal, from that of dealing with an SME that has managed to wade into the gumbo....