Banks keep tight rein on rural lending

Banks keep tight rein on rural lending

Banks continue to keep a tight rein on lending which has squeezed the rural real estate sales to a minimum. The big push for the next year is to reduce debt to more sustainable levels, so farmers can cope better with the vagaries of the weather or markets.

A change could be evolving in land ownership with groupings of individuals buying land to maximise initial equity and minimise debt.

These sort of operations could work well if good shareholding managers are involved, and the focus is on operating profit, not capital growth.

This will require a change in attitude from many farmers who often spend to minimise tax rather than spend for a good return.

Export commodity prices are sparkling but the outlook for the rural economy this year is "muddly", with banks keeping a stranglehold on farm lending and cashflows still tight, says ANZ National Bank chief economist Cameron Bagrie . But it will be 2012 before there is a rebalancing of overheated pre-recession land asset values and income, they say.

Farmers will continue to concentrate on reducing debt this year reports Stuff. The outlook for 2011 is better than for last year but the sector is "in a halfway house", Mr Bagrie says. Next year farmers will have repaired their balance sheets and commodity prices are expected to still be strong, he says. PGG Wrightson, the country's biggest rural real estate company, predicts more energy in the $10 million-plus farm market with farmers and other investors with cash teaming up to buy farms that would be operated like corporates, with shareholders and contracted management.

BNZ chief economist Tony Alexander says an indication of new economic life in the sector is a strong increase in tractor registrations last month. More people, including syndicates, with capital and only some debt would enter the market this year, he believes. But Waikato accountant Nigel McWilliam, a dairy specialist with Diprose Miller, says banks are responsible for the real estate market squeeze."We have farmers looking to borrow, and a number of clients looking to sell, and the banks are very involved with sale and purchase agreements, walking the property with the purchaser and then pouring cold water on the deal."

ASB rural economist James Shortall says dairy and meat returns are generally strong but farmers' cost structures are still high because of increases in inputs like fertiliser. Important farming regions like Waikato are struggling with drought and farmers are very cautious about spending after "a real shakeup" over cashflow deficits.

 

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This is not only happening in the rural sector. My friends partner is a RE agent in Whangarei and has had a large volume of sales fall over because of banks turning down the mortgage. This has been going on for over a year now and even includes instances where the loan was pre-approved. 

Gosh scarfie...why would banks be extra prudent in Whangarei....?

Well do you really want to know:)

Like everywhere but Auckland and Wellington they are actually having a recession.

Might be something to do with the 1000 professionals that left town during 2008. Houses in the $450K+ bracked are..... well lets say they have had to move the bracket down somewhat. I think you will find the 30% that Bernard is talking about has already happened in some places.

The Bank's are just getting back to the basics of cashflow lending (which they previously ignored). So this is normal and the earlier loose credit conditions were abnormal and unsustainable. Get use to it!

You are right that banks are getting back to basics. Lending has to be related to income but I don't think farmers have realised this.

Re corporate farms. It is very difficult for any size of farm to return a dividend to shareholders. There are managers, staff, corporate structures, consultancy fees, management fees,  and expensive CEO's etc to pay before the shareholder sees anything. Farms just aren't that profitable to support a corporate structure. Ask investors in farms in South America. 

Family owner operators work 7 days a week with no overheads and they just get by.

A large volume of business loans full stop have been falling over because of finance, last two years

 

PGG Wrightson, the country's biggest rural real estate company, predicts more energy in the $10 million-plus farm market with farmers and other investors with cash teaming up to buy farms that would be operated like corporates, with shareholders and contracted management.

 

 

But where is the money going to come from, Capital gains?

 

Its a wish list.

Economy of scale only works to a certain point as skeeter states the bigger the operation the more admin costs with financial reporting. I think reale estate companies are desperate to get revenue in as they are doing a starve.

Banks are reducing debt to help farmers meet the vagaries of market and weather.....

Banks are forcing farmers to the wall by calling in od's this year and are being very aggressive, it is all to do with balancing their books and asset values are falling so much the debt equity ratios continue to look sick.

Look at My Farm advertising 17% return, land has never been so cheap, land bank,what for farm values to go up etc, My farms just a vehicle for a  particular bank to feed into so they can unload distreessed farm business. Happened to be sitting in a cafe in a Manuwatu town and My farm guys and a particular bank discussing which farms to put up after Southland storm. Conversation not discreet, confirmed what a bunch of pricks banks are, they showed no sympathy for the plight of the farmers. At the same time bank going around southland district saying to farmers we will support you

Reminds me of a bank manager up north who put together 26 sales with same land agent and same lawyer in the peak of the race to get market share and most of those farmers are gone

ASB talk about high inputs for farmers fertilizer, only have to look at fert sales from fert companies annual reports to see that fertilizer expenditure is down dramatically. Only have to drive around countryside to see lack of inputs.

3 things:

1. Banks restricting lending. - requires deals to stack up at $5.75, 8.5% and a status quo surplus equivelent to 20 to 25 p&i terms (although will fund without any contracted principal reduction in place). This is the new norm. Deal with it. Hardly supports an investments that is returning higher than the WACC. Anbd while we're on the sunject would expect a qualified acountant to understand what makes a good rural deal. He's singing a similar tune to RE scum.

2. Cameron Bagrie suggesting farms balance sheets will be in order in 12 months time. Most farms have lost around $15k per ha in the North island. To try an replace this through trading/reduction of debt would take around 10 years. See this for what it is - propoganda.

3. $10m+ farms. To put it simply requires equity to around $7m to fund it as a going concern. How many businesses in an industry of $45bn debt has the balance sheet to fund such purchases. Scale is now being heavily discounted at the moment and will continue to do so for a while. Or one could look overseas for capital (sound familiar.)

"propaganda"....no no no...Bagrie bullshit...yes yes yes.

I was being kind to Penfold :)

I also think he could undertake some 'BNZ candid apology' for getting it so wrong over the last 18 months and obviously for the next 18 months of predictions.

I recall Tony Alexander stating in a newspaper interview that economists get it wrong 80 % of the time.

I give him top marks for honesty.

I always turn down invitations to hear economists speak.

I am amazed that some see them as Gurus.

Call the Gummster a " dumb thick prick " if you will ( many here do so ! ) , but if you limit the downside but un-limit the upside , then 80 % of losses , if each is comparatively small , is dwarfed by the 20 % of profits , if they be humungous ? .......

...... TA is brilliant . .. As is "big-balls"  Bagrie. .. . Gareth Morgan , the biggest kahunas of all  ..... And Bernard Hickey is ......... ummmmmm , ...... he means well !