Rabobank 'actively' looking to lend to farm buyers but sees limited short-term capital gains and is 'closely watching' wine sector

Rabobank 'actively' looking to lend to farm buyers but sees limited short-term capital gains and is 'closely watching' wine sector

By Gareth Vaughan

Rural lender Rabobank New Zealand says it's actively looking to lend money to farmers who want to buy farms but is warning potential buyers not to expect any short-term capital gain.

Speaking before the Real Estate Institute of New Zealand (REINZ) released its December farm sales figures, Ben Russell, Rabobank's New Zealand general manager, told interest.co.nz that he's keen to see an increase in the volume of farm sales. REINZ's December data showed 96 farms changed hands during the month, including 30 dairy farms marking the highest monthly volume of dairy farm sales since 41 in May 2008. REINZ said banks re-entering the market and vendor finance had helped boost sales.

Russell said the recent low level of sales meant it had been "quite hard" to establish a firm view on what farms were worth.

"The values will settle where they're going to settle and we as a bank can't particularly influence that, I don't believe. I think ultimately farmers will work that out," Russell said. "For us, the focus is on the ability of farmers to generate good cashflows, irrespective of what their asset's worth."

He estimates that the the price of good quality farms, where there are several potential buyers, had dropped by 10% to 15% since peak values in late 2007 and early 2008. However other farms, depending on the type of farm and location, may have dropped in value by 30% or even more.

The Reserve Bank warned in November that farm prices may need to continue falling to see “substantial” buying interest re-emerge and cautioned that further falls could see some dairy farmers who took on debt to expand during the boom times end up in negative equity. The central bank estimates farm prices fell by about 15% from their mid-2008 peak by the end of 2009 and said prices appeared to have fallen further throughout 2010, However, the extremely low volume of farm sales last year meant current levels of farm prices was highly uncertain.

'Re-evaluating market values'

Russell said he didn't think the farm sector was much different to the commercial or residential sectors of the property market where activity has also been slow.

"Really what we're seeing is a period of re-evaluation in the market of values. There has certainly been correction in farm values through 2009 and 2010. The market is gradually finding new levels. Overall we're keen to see a steady improvement in the turnover of properties. We'd like to see farms being bought and sold because that establishes a market," said Russell.

Rabobank was "actively looking" for opportunities to lend to farmers wanting to buy farms. That said, it's also looking carefully at the ability of farms to service debt used to help fund the purchase.

"And I think farmers are looking a lot more carefully at that too," Russell said.

"I think the prospects of significant capital gain in rural property over the next few years are reasonably limited. So I think farmers are needing to make their decisions on purchases based much more on the cashflow of the purchase rather than on any view of certainly in the short-term of capital gain."

"In the long-term you will see a return to longer-term trends of improvements in farm values but I think that will take a little while," Russell added.

In the meantime the rural debt market "certainly" needed a period of consolidation after a strong rise in debt in the years up to 2008.

"We believe that aggregate rural debt is unlikely to lift much in the next two to three years as more highly geared farmers reduce debt through both surplus cashflow and asset sales," said Russell, noting this trend was already underway. He said lower gearing, or debt to equity ratios, would produce better viability and greater ability to withstand market and seasonal volatility.

"On the other hand, there remain plenty of farmers with the capacity and desire to expand and viable proposals from these farmers should be supported by banks. Overall we expect to see the rural debt market remaining flat over the medium-term," Russell added.

The latest Reserve Bank data shows rural sector debt at NZ$48.030 billion in November, up slightly from NZ$48.017 billion in October and up NZ$723 million, or 1.5%, from NZ$47.307 billion in November 2009.

Minimising forced sales

Generally Rabobank, and other banks, were looking to support farmers through difficult periods, he said. Rabobank tried to minimise cases where it "formally realises" its security over farms and farmers assets.

"There are a very, very small number of those cases, certainly for us anyway," said Russell.

"The majority of farms in New Zealand are sound businesses with good equity and a good future but there's certainly a proportion where their ability to service their debt has been put under stress through a rapidly changing world."

Rabobank, alongside Westpac and PGG Wrightson Finance, is one of three lenders owed a total of NZ$216 million by the in-receivership Crafar Farms group. Russell wouldn't comment on the Crafar situation but said overall Rabobank had "minimal provisions" in its dairy farm portfolio, although it had a number of impairments.

'Impaired assets stabilising'

Meanwhile, Russell said the NZ$168.2 million, or 79%, increase in Rabobank's impaired assets in the year to September - revealed by the bank's latest General Disclosure Statement and reported by interest.co.nz earlier this week - largely came in the December 2009 and June 2010 quarters and was a consequence of the downturn in the rural property market.

Impaired assets in the September quarter only rose by about NZ$5 million from June and he expected another "modest" increase for the recently completed December quarter. Russell said Rabobank's level of impaired assets should be relatively stable during 2011.

"We remain cautious about credit risk even though we think things have stabilised," said Russell. "The New Zealand rural sector is showing steady signs of recovery across most sectors, with continued strong demand for most agricultural commodities."

Prices for New Zealand commodity exports hit record highs in both world price and New Zealand dollar terms, December's monthly ANZ Commodity Price Index shows.

Capital injection

The Rabobank Group was "enthusiastic" about the long-term prospects for New Zealand’s food and agribusiness sector, Russell added, noting that Dutch parent Rabobank Nederland injected NZ$300 million of tier 1 capital in September last year and NZ$300 million of tier 2 capital to support further New Zealand growth. Rabobank’s AAA credit rating had also been reaffirmed by Standard & Poor’s in New Zealand.

"The bank is recruiting more rural banking staff and seeking sustainable business growth," Russell said.

Eye on wine sector

Meanwhile, Russell said Rabobank was keeping a "careful eye" on the wine sector which comprises about 5% of the bank's lending portfolio. Rabobank has more than 70% of its loans in the sheep, beef and dairy sectors.

Deloitte and New Zealand Winegrowers' recently released annual financial benchmarking study of the wine industry noted steadily declining profitability and rising indebtedness in the sector and warned that an expected bumper 2011 grape harvest could undermine the industry’s premium international positioning.

However, Russell said Rabobank believed the New Zealand wine industry had a lot of enduring strengths, such as being able to command a premium in international markets. Exports, now worth more than NZ$1 billion annually, had been "very positive" in terms of volume and continuing growth in terms of value.

"So we think there's a great future for the New Zealand wine sector," said Russell.

"However, the sector is absolutely undergoing a very difficult adjustment period at the moment between the halcyon days of Marlborough Sauvignon Blanc grapes being worth NZ$2,400 a tonne to today's market where, if you've got a contract ,they're probably worth around about NZ$1,200 a tonne."

Rabobank wasn't underestimating the difficulties the sector currently faces.

"I think grape prices are unlikely to return to the levels that they were at (three or four years ago) for some time," said Russell.

"I think grape growers and wine companies need to work around the new reality of pricing of grapes and wine broadly where it is now, hopefully with some gradual, steady improvement. That's the new reality the wine industry has got to deal with and so do the banks that support it."

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21 Comments

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Perhaps a case of LVR substitution?

"Credit risk has stabilised"....really!......anyone believe them?.....nope!

      Same BS different day

 Mass man is not a thinker. He is a reactor. He reacts to the weather...to prices...to the economy...to demagogues...and even to ideas. He accepted the system of modern social welfare economies because he was comfortable. But what will he do when the system is unable to make good on its promises? My guess is that "the system" in the advanced countries is approaching its final stage... Why? It just can't pay. The current bank BS and spin wont fix this broken toy.

 

Gertruad T posted this excellent article this morning

http://www.zerohedge.com/article/guest-post-disinformation-fog-intensifi...

 

Its I think a very good summary of where we are. Some highlights

>>

 

 

Anyone today who denies inflation is evident in our economy is either blind, dishonest, or mentally deranged. In any case, they are not to be trusted. The question now is, is this inflation being caused by devaluing world currencies like the dollar, or a myriad of random chaotic “coincidences”…

Lie: Current Inflation Is Caused By “Global Recovery”, And “Rising Demand”

 

The great lie surrounding these inflationary warning signs is that they are a product of “recovery”, and increasing demand in the U.S. and developing countries. While the “demand” argument may be partly true for gold and silver’s rise, it is certainly not true for oil and grains. Global demand for goods overall is dropping off a cliff, as is evident in the Baltic Dry Index, which measures shipping and freight rates around the world. The BDI has suffered a 20% decline in the past three weeks alone:

 

If shipping demand is falling around the world, then demand for goods is falling around the world. If demand for most base goods is falling, then demand is not the cause of our current price spikes. Period.

More Americans filed for consumer bankruptcy in 2010 than in any year since 2005. Keep in mind that the government’s new rules making bankruptcy filing far more difficult took effect after 2005. This means that even with harsher bankruptcy guidelines, we still saw a massive wave of filings last year. If demand is actually a substantial factor, then U.S. consumers are burying themselves in red ink in order to support it:

 

 

Lie: Food Inflation Caused By “Bad Growing Season”

It would appear that the “mystery” of exploding food prices has been solved, and according to a USDA report released this month, the culprit is “weak agricultural output” causing a diminished supply of staple grains in the U.S.:

This release was so shocking to markets because the report’s figures were so far below the USDA’s original estimates for harvest at the middle of this year, but why should we care about the USDA’s estimates? Are they not arbitrary? Why not look at the actual output for previous years compared to 2010 and get a real sense of what is happening?

If we are going to compare the crop outputs of 2010 to 2009, we should also keep in mind that 2009 was a record year for agricultural production. Did the USDA really assume that 2010 would meet or surpass such a bumper crop?

Corn harvests reportedly dropped 5% compared to last year, however, 2010 was still the third largest crop on record. Soybean production was down only 1% from 2009. Cotton (not edible, but still important) was up 50% from 2009. Wheat was down less than 1% from 2009. One of the only grains affected in a substantial way in 2010 was Sorghum. The crop yield for Sorghum dropped 10% compared to 2009, but the planting area used in 2010 was 19% less than a year before, so this drop was to be expected:

What does this mean? The U.S. had a GOOD year for crop output, not a bad one. And what about Russia’s summer disaster wheat crop? Are our exports picking up the slack of bad harvests overseas, causing prices to rise? Actually, warmer Russian weather in November spurred wheat production, helping alleviate the weaker summer yields:

 

Are there dangers in world grain output due to weather? Yes, but not enough to warrant a doubling of commodity prices. The REAL concern of agriculturalists, not just in Russia but in many nations, has not been the weather, but the ever expanding costs of production itself! From fuels to fertilizers, the process of growing food is becoming more and more expensive. What is facilitating this surging cost of production? How about the one factor that no one seems to want to discuss; the devaluation of major currencies, most especially the dollar? I find it interesting that so much disinformation on supply and demand in commodities is hitting the news streams just as the Dollar and the Euro begin to unhinge. In my view, this engineered hysteria is meant to distract us from the collapse of our currency, and to create plausible scapegoats for the inevitable ill effects that devaluation will bring.

 

 

I remember AIG had a triple A rating........I'm just saying...

Spot on Andrewj Heard on Radio other day reasons for NZ's inflation will be GST increase and Fuel. Shipping companies are trying all sorts of ways to get full boats and taking longer to get product delivered by slowing down boats to save money on fuel but creating problems of getting product to markets at right time which affects chilled product.

As stated by Fonterra after latest auction the market is still volatile and no guarantees that prices will continue to go up for dairy product yet. Its all ifs buts and maybes.

Janette

Look at this from the US dairy industry

 

>>

One of the reasons why that is of concern is the apparent current consensus within the industry that future growth and prosperity can only happen if the U.S. becomes a major exporter of dairy products.  Until five or so years ago, exports of nonfat dry milk and dry whey were the only two dairy products with consistent, meaningful export volumes.  That changed in 2007 when a sweet combination of factors pulled the U.S. into a higher bracket; 

shortages of products elsewhere, growing demand, and a weak U.S. currency transformed the U.S. industry into a viable source for products that couldn’t be gotten elsewhere.  The ultimate lesson learned from that opportunity was we had to be reliable, understanding, and competitive.  Reliability means the products must be available when needed; understanding means we need to oftentimes commit to prices far in advance of shipments; competitive means our prices need to be no higher than those of other exporting nations, and often much lower

<<

Id bet we are not going to be the biggest exporters for long. It comes back to currency, unfortunately we dont get to print and destroy our currency like others. We have too much offshore debt for that, and with out a strike force we just get to pay up.

 Corn prices up over %100 percent in six months is going to hit the Chicken and pork industries hard but who is going to be able to pay? I see Mc Donalds in te USA has reduced it s orange juice by %11.

 This is just going to be a big ugly mess.

 

As we become more dependent on China

>>>

Fonterra’s cutting back on production of skim

milk powder in favor of whole milk powder (for China), may be affecting international prices for nonfat powder

One in 8 Americans being fed through the food stamp program - and guess who administers it?

JP Morgan.

http://fedupmontrealer.blogspot.com/2011/01/jp-morgan-king-of-food-stamps.html 

 

Fonterra supplying more whole milk powder to China and affecting prices for skim milk, no doubt the Chinese will add value to the whole milk powder hope they get their melanine levels right.

Janette, the problem is we are exporting more to China at lower prices, and China is doing this

http://www.telegraph.co.uk/finance/china-business/8272388/SocGen-crafts-...

 

And I find it hard to believe that crossbred wool will recover when its mostly used for carpets and housing in most of the world that uses wool is going negative in a hurry.

Once upon a time there was an emporer who wore no clothes.. For the longest time no one noticed            http://historysquared.com/2010.../

Aj Interesting blog following the article you posted

The NZ govt could make wool insulation mandatory in housing regs that would absorb some of it.I personally think for wool to get ahead we have to stop thinking of it as a fibre and look at the other attributes it has and think outside the square. If they can make "biodegradable" cell phones out of maize they should be able to find some other uses for wool.

 

Janette,Aj, Wool up another 11% at this weeks auctions or around 50c per kg. Next weeks Alliance lamb/mutton schedule up 20c/kg beef up another 15c/kg at a time when as you know its normally dropping like a stone. Aussie floods ,Korean foot and mouth, dollar softening, rain, feed, US beef herd at 57 year low, Argentinas dropped 36% in 2 years, Aussie sheep numbers at 105 year lows. Perfect storm!

Wonder how much of that hot money is flooding into the Auckland residential market...bet the RE mob are still over in Asia hawking the sales.

Bubbles go pop. This one will be nuclear in scope. Bang goes the whole game. What will it mean for Bill's 6 part strategy and promise of 170ooo jobs from the export sector boom.

The point punters gotta understand...these are not the times when you should be borrowing the credit...the clue to this being a dumb move is the way the banks are freshening up the bait with special offers, while also criticising farmers for having "lazy balance sheets".

But if you're a dumbo...go grab some cheap credit...somebody has to be left holding the debt when the axe swings down.

Interesting link Aj. Agrifax also reported a couple of weeks back that retail prices of lamb have risen only 3% in the UK year on year despite farmgate returns being up circa 30%. To me that just means we producers are getting a bigger piece of the pie. For too long the supermarkets held the whip hand and they are now reaping what they have sown. Having driven down meat prices in real terms for many years they now find that supply has dwindled to a point that we the producer now hold the cards. With feed grains now going up its debatable whether even at current pricing any sort of herd/flock rebuilding will eventuate. Of course when it does it will only serve to take more meat out of the chain in the short term, further tightening supply. Perhaps its just or turn to be on the winning side?

If you are buying a new house in a new subdivision in a growing Waikato town, check the attic.

I was told recently of a 'Chinese Gang' building houses in a Waikato town in a new subdivision. After the Council does it building inspection, the 'Gang' goes through and takes out all the insulation.  Buyers are buying these houses on the basis that the council have given them a code of compliance, unaware until later that in fact it has no insulation/batts.

The Asian hot money is not just going in to Auckland. Word has it that this subdivision was done by Chinese.

 

Check that herald Hamilton report CO...sinking feelings....!

It is clear that the article is nothing more than malicious anti-property misinformation from envious and negative have-nots.

Tenants should not be permitted to speak to the media because they try to spread lies about developers and the joy of property ownership.

 

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/8275060...

 

“Cadete Zapatero, on which side of the Titanic would you like us to put the deck chairs – port or starboard?”

Cadete Zapatero, “Let me ask Mi Capitán Barrosso”

Mi Capitán Barrosso, “You can put them anywhere you like as it will make no difference to how I will blame you – but let me also ask the Almirante de la flota Merkel so that I can also blame her later”.

Almirante de la flota Merkel, “I am sorry you will have to wait for a reply as my German crew and I are busy boarding the life-boats”

Cadete Zapatero, “Well that must mean we must put the deck chairs below decks then.

Jonathan

 

 

Sigh. Yet another of the list of things the Euro-shills kept telling us could not happen, happens.

Spain's cajas have been their version of off balance sheet accounting. They were allowed to accumulate liabilities and hide them while the Spanish state boasted about its fiscal prudence.

But sooner or later the truth always comes out. Now the risks that were hidden in the cajas will gradually be transferred to the state, and Spain's credit-worthiness will gradually erode.

jolivesey

 

http://www.oftwominds.com/blog.html

 

We recently spoke at length with a young Chinese friend who travels extensively in China in his engineering/design job. He reported that prices for some food items have doubled and tripled practically overnight. That suggests the official estimates of food inflation are lower than the reality facing consumers.