Agricultural Debt and private sector credit (PSC) appear to have been in something of a holding pattern during February reports Agricultural Production Economics. There has been something of a dead cat bounce in several areas of the economy, which possibly continues into March. In brief, bank lending to agriculture in February increased $149 million to $42.84 billion - with an additional $12 million being provided by NBLIs. The $149 million is the lowest level of monthly advance to farming since early 2007 and less than half the next lowest month of the past 12. The reduced rate of increased lending in February is a major change, but does not indicate that the $12 million per day of agricultural life support funding alluded to last month is no longer needed. The lower lending figure has almost certainly been achieved in combination with the lower farm banking facilities notified by the National Bank in early January to take effect in February. Yes "“ some non-essential farm asets will have been sold, and some more farm creditors will not have been paid. That is not a strategy that can be repeated for long. Significantly indebted farmers returning to profitability and paying down lending notwithstanding, meaningful reductions in lending to agriculture will only happen when farms start being sold to new owners with lower levels of debt. That infers a loss of equity on the part of the vendor, and sometimes also on the part of the lender. The next six to nine months look ominous - the dominos involved are becoming clear if not exactly the order in which they line up:
- The farm asset bubble has burst - asset values have fallen considerably and are likely to fall until farm prices reflect farm profitability
- There is a huge amount of debt throughout agriculture, and not a lot of profit
- Agriculture has damaged industry credibility by providing misleading information
- For farms changing hand the focus will be on profitability rather than asset appreciation "“ old agribusiness thinking regards farming being about asset management is falling into disrepute
- Focusing on farm profitability will in many cases result in lower farm production intensity
- Banks attempting to remain solvent will drive farm sales "“ possibly to realistic values
- Fonterra faces extreme redemption risk "“ setting a realistic share price will be critical
- There remains a lack of credible leadership at all levels
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