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.
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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