Tough times ahead says Reserve bank

Farmers should brace for their bankers toughening up on lending reports Country-wide. They should brace for a sharp fall in land prices, too, the Reserve Bank is urging. Dairy farms seem most at risk, the central bank says in a report which warns that sharp rises in agricultural debt levels in recent years "may not be sustainable..." The latest six-monthly Financial Stability Report advises bankers to make adequate provisions and maintain enough capital to absorb unexpected losses. The agricultural and commercial property sectors "warrant particular attention", it says. Essentially, the risks in agricultural lending have become more pronounced as lower commodity prices and the weakening world economy reduce export receipts. BNZ chief economist Tony Alexander in late April similarly spotlighted agriculture as the sector most likely to find it harder to get credit during the global credit squeeze. He was pleased to see the Reserve Bank echo his concerns in its report. The substantial debt growth in the agricultural sector over the past few years had seemed acceptable, in most quarters, as land prices soared. More credit became available, too, as Rabobank and ASB moved in to the market. But lending conditions have changed and Alexander is unsure about the outlook. No one knows how long it will take for the dust to settle from the global finance collapse. Agricultural credit continues to grow, however, thanks to a marked increase in seasonal financing as some farmers deal with a drop in their returns. The use of overdraft facilities earlier this year was higher than usual. Making prospects bleaker, rural land prices are likely to come under increasing pressure through the rest of this year. The market for farm sales is "very thin"- the number of farm sales is well down on this time 12 months ago. But default rates on agricultural lending so far have been relatively low and the major banks have signalled their intentions to help rural borrowers through a period of weaker returns.