Exploring farm debt

Exploring farm debt

The financial rules have changed in today's economic environment.

In the past farmers borrowed on their equity, and the ability to repay debt was often a low priority.

The huge sums borrowed for dairy conversions have been on the promise of large lifts in production earnings, but often at the expense of big increases in costs.

Risk factors in a now failing land market are being exposed. Farm income historically has been cyclical and volatile in values, and better financial planning is needed for when prices fall.

Successful operators in the future may well fall into only two categories; very conservative, or top financial managers with flexibility to follow a consumer focus.

Farm debt was the central theme at one of the many recent Beef & Lamb NZ seminars being run throughout the country reports Rural News.

Rob Macnab of Rural Business Solutions presented some sobering figures for those thinking about taking the plunge and converting to dairying.

Macnab outlined data showing farm borrowing rising from around $13 billion in 2001 to $47 billion in January this year, much of it attributable to dairy conversions.

“Do you as sheep and beef farmers realise that your debt has increased by 46% per farm between 2004 and 2008? Farm debt currently exceeds 400% of total agricultural GDP, with 20% of sheep and beef farmers responsible for 64% of your share.”

For those considering dairy conversions, Reserve Bank data shows dairy borrowings, based on a payout of $5.50/kgMS, in some cases had reached a cost of over $100/kgMS.

Macnab detailed the new debt servicing environment in today’s volatile economic climate – it needs to be based on a realistic operating budget, principal and interest payments have returned, and a factor called ‘interest cover’ now prevails.

This term is defined as the ratio of profits before tax and interest to interest payments. Macnab’s data demonstrates that agriculture’s interest cover has – over the last decade – never risen above a ratio of 2, compared with say wholesale and construction which has reached ratios of 11 and 13.

While rising product prices could help farm finances, farmers should remember that input costs would rise alongside these as always, banks would place heavier emphasis on risk margins, and interest rates would rise accordingly.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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"bullshit value" ...oh you have that right winnie...only the farmers who told the banks to shove their credit where the sun never shines will be harvesting the good returns and salting away the capital...the rest are now serfs to the banks.

The debt spiral it’s happening, when the majority of the farming community is sucked up by a few greedy combine harvesters. What an economy ?

I hope you are not banking on a $7 payout this year rayzzor.  If you really believe that you have your head in the sand.  $6 is a good payout - to the majority of dairy farmers, but there is a portion for whom the bells may toll at that price. I agree - it is no different to the housing market and I hope SCF are allowed to fail and if that means Dairy Holdings goes down, then so be it. 

S Shagger, I agree, there are a lot (like the majority) of farmers both sheep and dairy who are doing 'ok' to 'very well thankyou'.  But we aren't newsworthy.  Only bad news sells and from that the public perceptions are formed.

"With 20% of sheep and beef farmers responsible for 64% of your share" Read 80% at no or moderate debt levels likely to be reaping quite a nice wee income this year going by the strong market priceing we are seeing looking towards this season. Im sick of all the manufactured "crisis" headlines churned out with sights set firmly in the rear view mirror.

Surely the main issue is the ability to service ones debts. I would imagine prices for all products will be north of bank imposed budget levels so for all but the most highly leveraged(Craferesque) or incompetent operators most should be fine. Move along please no crisis here!

The sad truth is that we cannot blame city or country folks directions for the position we are now all in. We can only blame ourselves for blindly following and accepting the direction we have been steered in.

 Small business was the backbone of NZ. Then we got convinced that we had too many small enterprises and  middlemen that inflated costs to the buyer and reduced values paid to producers......

So we got Woolworths and Warehouse plus Fonterra and Zespri. Shit, hasn't life been great since then! Aren't we all so much better off?

After that we removed the life savings of our retirees and plenty of others via finance company collapses. They couldn't earn a dollar by starting their own small productive business because compliance costs rooted that consideration. So just put your bucks into a place that invests in people that dont stand a chance within the same parameters.....

You cannot even start a homestay these days to give yourself a scant income. That could possibly provide some downstream revenues for builders and subbies BUT first you face RMA costs that would destroy your first five years income. So back to funds in the bank.... are not gonna see any change. More likely we will see Winston back and with power....but still the same old shit... More power to bankers and big business.n all the unemployed people through that t

He'd have told them to think bigger......