Crisis looms for some farmers unless debt is lowered because lenders will be hard-nosed when viability is weak

Crisis looms for some farmers unless debt is lowered because lenders will be hard-nosed when viability is weak

This article is concerning especially after the past two excellent income years, and shows that some farmers have not taken on board the lessons of history, and are still carrying too much debt.

The worlds financial climate has worsened considerably over the last year and lenders will now be more hard nosed with those whose profitability is weak.

Westland Milk Products recent adjustment to the projected payout for this coming year makes sobering reading (at $5-00-$5-40/kg ms) with average milk farmers needing at least $5.00/kgms to break even.

Those with high debt and costs will struggle especially if the El Nino dry summer that is predicted, occurs.

Things will not be much better for sheep farmers with wool income plumetting and meat returns taking a heavy hit from the recessionary European economy.

Costs will need to be pruned to the bone and budgets carefully monitored if the bottom 20% of farmers want to keep the lenders from their doors.

High levels of farm debt could send up to 10 per cent of farmers to the wall in the event of a major drought, according to Fed Farmers president Bruce Wills.

"We have a very highly indebted rural sector, no question, particularly our dairy sector," Wills said in reaction to Reserve Bank figures which show agricultural debt has taken a sharp upturn in the first half of this year, sitting at the end of June at $48.3 billion reports Stuff.

The figures are particularly concerning because a new Farm Price Index developed by the Reserve Bank and the Real Estate Institute of NZ shows that farm prices have declined by 24.8 per cent from their peak in October 2008, while agricultural debt increased by 12.7 per cent over the same period.

A combination of high debt and falling land values could put pressure on farm balance sheets and is a particular concern because farm incomes have been falling due to lower commodity prices and the stubbornly high NZ dollar.

The latest Federated Farmers Farm Confidence survey showed a sharp decline in the number of farmers expecting to be able to reduce their debt levels over the next 12 months. At the beginning of this year more than half of all farmers expected to be able to reduce debt over the following year, but by June that figure had dropped to under 40 per cent.

"We now have higher rural debt levels than when the worldwide credit crunch hit in 2008, which is pretty concerning because we should have all got the message that we are carrying too much debt," he said. Much of the debt was taken on during the dairy boom of the mid-2000s, which Wills likened to events leading up to the 1987 sharemarket crash.

Wills said the dairy sector was carrying about $20 of debt for every kilogram of milksolids it produced, equivalent to $2.2 million of debt for a farm with average production of 110,000kg of milksolids a year.  But that was an average, and it was likely that much of the debt would be concentrated among perhaps 20 per cent of farmers, Wills said. That would leave many of them vulnerable if low commodity prices continued and there was an adverse event such as drought.

"Eighty to 90 per cent of farmers will be absolutely fine with the commodity price softening and if it turns dry and we get an adverse weather event," he said.

"But there's a bunch of farmers out there with a whole heap of debt who in my view won't make it. "This debt situation got a fair bit of attention about 18 months ago, and then we had that wonderful 12 months of high commodity prices, thank goodness, so it got forgotten about.

 

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But Tony, isn't that just the problem. The banks are not being hard-nosed enough - on themselves. Some say its a surprse they keep lending to themselves....
 
The lenders are not marking to market
The lenders are not fessing you to the dudd loans they have
The lenders still provide loans where by there is no demonstration of capacity to repay the loan (P&I) over 15 to 20 years..
 
Q: Just how do you see "farmers" deleveraging (where is the post tax income to repay debt coming from)?
Hint:
1. Look at the past few corporate farm collapses and how the banks played thier hand.
2. There is no Rural Bank/State advances to take a capital write down.
 
We see some of the mad cap borrowers not necessarily in bottom 20% of production...
It really is a financial structure thing first order..
 

if the banks had been hardnosed early on homeowners and farmers would not be in the mire they are now.
loaning money to people based on potential growth is full of pitfalls as we have found out

Wow shes pretty difficult to lower debt via tax paid cashflow, specially so in the low margin game of farming - $6.20/kgms payout less $4 FWE less $1.50 Debt Servicing less Deferred Cap Ex. less tax less drawing doesnt leave to much for Principal Reduction.
And it also doesnt take a rocket scientist to work out that you actually cant reduce debt fast enough on these sorts of margins with debt levels of $20-25/kgms.
The only practical way to reduce debt is for Capital Gains (Inflation) to dilute the effect of excessive debt - which is what the Western World is trying to do right now................
Our problem is that while this happens offshore NZ is seen as a safe haven and hence the demand for the $NZ continues to increase resulting in a higher exchange rate (and house prices in Auckalnd) and even more pressure on us primary producers. 
Hopefully offshore farm investors are going to prop up our rural market as they can afford to pay more for them with our higher kiwi $.
We wait and wait in hope otherwise we will be running around in grass skirts 

I agree completely Grumpy, looks like the Chinese are going to be able to buy a lot of NZ Dairy farmland when the banks tip over 20%+, of the over extended farmers.
It will make the Crafer sale insignificant in comparison.
When do you think  inflationary capital gains will occur in the NZ market?

I guess it started 15 months ago with large (20% from the bottom of the market in 2010) increases in prime Waikato and Canterbury land when the payout hit $8, but not sure were its heading now as nothing has sold since the payout projections crashed in March/April this year.
This lift took the pressure of the banks "bad clients" who were pushed out when there were opportunities to do so. I think the banks will hold off getting to hard on their remaining "bad clients" so they dont look so bad and hope that the job picks up again based on the China Story, world food shortages, a drought in the USA and off course the western world money printing machine inflation effect kicking in.
Very simply if the above happens we will continue to see inflation in food prices which will automatically be priced into farm land values.
There are alot of big money people watching NZ and waiting for opportunities to get in. These people see NZ farm land as been a very secure investment long term as farms have the ability to produce a product for infinity where as a share or building has a limited life - this is one of the reasons why yields (or Capitalisation Rates) are so low in farming.
NZ is also fast becoming a safe haven for the rich, plenty of quality well located farms and coastal property have sold to such people over the last few years and we are seeing the same thing in places like Auckland where these cash buyers are happy to pay a premium to get in which in turn lubricates the wheels of Mr Market and off she goes.
If Europe and USA continue down hill in thier death spiral then its likely to be positive for quality NZ property as the rich search for a sound safe haven base. I suspect its also the same story for alot of the asian buyers at the moment. This is also one of the reasons why our $NZ is so strong at the moment (appart from NZ Inc having to borrow heavily). 
 

The debt issue in the rural sector hasn't been forgotten about in the last eighteen months, ask farmers what their main concerns are and debt, finance, comodity prices will be top of the list. Despite the so called best income years many farmers haven't been able to take advantage of increased values, cost of production is still doubling every 4-5 years and out stripping any gains in product value.Ask many of the lamb finishers what their margins have been this season.
There is a perception that a farmer has to be in the bottom 20% to get strategic banking attention, not so. Many of the farmers I deal with are producing positive cash flows and servicing debt, the problem is their equity position is skewered, with diminishing land values.  There are still plenty of farmers paying 9% plus interest due to Swaps mortgage packages that were aggressively marketed in 2007 2008 and the cost of break fees prohibits them from refinancing.
Banks are still aggressively hanging on to market share. Case in point, a well established farmer in strategic management for past two years under huge pressure from bank was able to refinace through another bank with debt servicing reduced by $150,000 pa. He went back to his original bank to inform them of his decision to leave the bank he had done business with for 20 years. The same bank then offered him restructuring and lower interest rate that would reduce his debt servicing by $350,000. So the solution is within the banks gambit if they wish to.
The other solution which would create a slightly more level playing field and seek to rebalance to some extent power imbalances is the introduction of a debt mediation bill as is the case in NSW, Queensland and Victoria and also Canada. The mediation process would force banks to engage in a more meaningful manner and set a process that is fair to both sides.It works in other countries and could be applied here.
I am in the process of gaining acceptance of the bill through the legislative committee and the bill is undergoing a review. Bruce Wills doesn't support the notion of  debt med bill a he feels the market  will correct and manage itself and  why should good farmers be disadvantaged by so called "Bad" farmers, after all he is the "bank expert"He also argues that the cost of a debt bill would increase interest rates for rural lending, he is yet to produce evidence of that.Research has shown in other countries the debt med system actually reduces costs to banks as there is less reliance on receivers.A debt med process is not a get out of jail card, there will still be some businesses that will have to exit, but it creates a more considered,system for both the banks and business owners to work within.
 As illustrated above the 20 year bank obviously didn't have a problem with the farmers ability otherwise they wouldn't have made him another offer to entice him to remain with that bank.
 

Swaps mortgage packages that were aggressively marketed in 2007 2008 and the cost of break fees prohibits them from refinancing.
 
I extend my deepest sympathy to those paying fixed in a falling interest rate market. I would have expected someone to have challenged the legality of the break fees - usury in it's extreme form is an unacceptable penalty and should be outlawed. Interest rate swaps  covenants make loan shark tactics seem respectable. 
 
Nothing compares to local elite legal profession working for ISDA and not hardworking Kiwi exporting farmers.
 
 
 

Sometimes I dispair...where is the "I signed a contract I live up to it"?
Now if its shown to be un-fairly sold, sure.....but really an adult took on a rate thinking it was the safest option and we have fallen into an un-usual hole not seen in 80 years...
If we had had the hyper-inflation so frequently promised by some Im sure you would be expecting the banks to take the loss.  If those same ppl made a faulty decision to pass what they thought would be a cost onto others, a sort of futures market, they gambled and lost why should they gain?
Moral hazard........
regards

Well yes,
Its the size of the break fees....
 
Then it seems a Goose Gander situation..
When push comes to shove the last thing the banks do is take a loss.
Think of the Govt. support banks have over the past few years gtee wise.
South Canterbury Finance..........................
Think of the scrap over tax pmts with the banks preference shame/share deals.
Remember the lengths to which Govt. had to go to get the tax paid...
 
Big picture they privatise the gains and socialise the losses
And we have talked of how banks account for write-offs and reliefs they have.
 

and just what we need:
http://www.stuff.co.nz/business/money/7454255/Heartland-applies-for-bank...
 
Heartland has given the Reserve Bank independent reports and a written request for consideration and expects the central bank to seek further information to gauge the building society's fitness.
Heartland told its investors gaining approval was not certain.
 

Steven - Banks have a significant advantage when encouraging borrowers to fix their rates. In fact they most likely rely on getting a percentage of people to fix at certain rates as this can guarantee the banks income on specific quantities of money loaned or should I say created.
 
It is probably only 20 or 30 years ago that Caveat emptor, was where responsibility lay. However we are now in a position where Caveat venditor is where the responsibility lies.
As banks are selling a product would/should this apply to them?  If the banks encouraged or promoted the fixing of rates would this not be deemed an unfair advantage that they were able to write a contract for the supply of their particular banking product.
 
Every farmer accepts that they are going to have to pay commercial interest rates on their mortgage. The trouble lies when the bank is both the lendor and has an advisory capacity.
 
Maybe retired farmers could set up a private banking trust and create an in-house NZ banking system for rural lending.  The benefits for NZ agriculture would be enormous.
 
Interestingly in my Grandfathers era most farmers lent to other farmers or those wanting to get into farming and the system worked well. 

If those same ppl made a faulty decision to pass what they thought would be a cost onto others, a sort of futures market, they gambled and lost why should they gain?
Moral hazard........

 
As I have said to you before, go away - your crass interpretations and failure to recognise the Fed is asymmetrically rigging the fixed interest rate market to benefit those financing position, not only astounds me, but bores me rigid other than the fact it gave me a huge personal advantage in times past.
 
I equally recognise those expecting their bank to operate ethically with a moral code firmly embedded in interest rate management recommendations is long past.
 
But farmers should not be forced to borrow on a floating basis and then virtually be commanded to pay fixed in the swap to manage recognised costs when the banks fully expect central banks to favour their leg.

Break Fees were all there in the paperwork - up front and honest, as they always have been and always will be. The fact interest rates fell just as people tried to insulate themselves from high short termn rates and take advantage of the cheaper longer term yields (care of an negative yield curve), rates dropped so significantly that the break fees were massive.
 
There is nothing unfair about this - you take a fixed position at the risk of not being able to participate in upside - but being insulted from the downside.
 
What wasn't fair was when the banks then went out and increased the bill rate loan margin the swaps were taken against - essentially backing these customers against the wall. Were these loans fixed, this could never have happened.
 
The reality is many farmers were not sophisticated enough to involve themselves in such products and the banks were complicit in taking advantage of this. The rural managers sold these as "same as fixed rate loans but with benefits". This was blatent mis-selling and I'm surprised that this never ended up in court. We used to have many a conference call to discuss if the client would look at legal options. We then went out and tried to unwind as many positions as possible.
 
It is for this reason the Banks are bastards. Break fees doth not make a bastard out of the Banks - that is human nature.

ITYS have a look at Sunday Star Times tomorrow business artcicle on SWAPS

Let's hope the authors grasp why there are notional USD 402,611 billion (yes, that is ~$403 trillion) interest rate swaps outstanding. If were not so profitable for banks to engage in this particular massive transfer of wealth engagement they would be more bankrupt than they are already.

Here it is:
http://www.stuff.co.nz/business/farming/7462273/Farmers-fail-under-misso...
 
Federated Farmers president Bruce Wills, an ex-banker, said there were some problems in some cases with the way the interest rate swaps were sold.
“Senior bankers have told me that some of these products have been pushed out there without enough explanation or understanding.”
We think Bruce is too kind - bless...
 
Accountant Stephen Stafford-Bush, chairman of the Institute of Chartered Accountants influential regional advisory committee, is more forthright, and says he believes the swaps were missold in many cases.
“The big question mark is have the banks acted illegally? Probably not. Have they acted unethically and immorally? In my view, yes," he said.
 
and what we were saying earlier...:
Nicholas said farmers were able to negotiate some concessions with banks, such as lower interest rates, but had to sign gagging contracts enabling the banks to shut down criticism.
 
Tom Scott has done some good drawings of late...
 

Mist check those dry cows for salmonella, if they weren't expected to go dry.  We don't use pk as a rule.  However, I have a mate in the Waikato who used it last year as a regular feed, and they had an additive (from the USA) put in it - don't know what it was, sorry.  Had well in excess of 70 cows 'get sick, some of which went dry'.  Turned out they all had salmonella. Farm worker ended up being hospitalised for more than a week, due to contracting it. It turns out my mate wasn't the only dairy cockie who had cows infected with salmonella and was feeding pk with this additive.  It seems to be the additive, though for quite a while the authorities here - PK agents, Fonterra, DairyNZ etc didn't want to know about it, but in the end couldn't ignore it.
Not sure if this is any help to you, but when you said 'dry cows' it made me think of my mates situation last year.  Hopefully your situation is very different.

I too have some fixed interest debt in a falling interest rate environment.  It's a deal I made in a tiime of great uncertainty, and it has eliminated uncertainty, although it has turned out to be at a cost.  I won't complain to anybody but myself. 

Doesn't stop you looking for a way out..
Threaten to take business away, and see the fees vanish...
Remeber Lady Gaga - use your Poker Face...
 
 

Banks are caving in, if you know the buttons to press...
 
they have signed gagging agreements not to speak of the deals, they report banks waiving break fees on swaps, which can run into hundreds of thousands of dollars, or cutting their margins on loans....
 
http://www.stuff.co.nz/business/farming/7549005/Risk-experts-banks-left-...
 

Thanks Janette for your insight.

On the other hand Tony, if the bottom 20% of farmers carrying the massive debt loads were to come together via the Web and agree to tell the parasites to take the farms and let them go free....the same banks would be screaming at English to do something...he would be screaming at Bollard to do something....
What would happen to the rural land values.....the parasitic balance sheets would look like the Sheep throat cutting section on a chain.
That's the cake the parasites baked...and the same cake that would destroy National's rural support....
So Tony...the most likely outcome is a govt pork bailout for indebted farmers...cheap state finance to ensure they did not walk off the land....money coming from the very same QE printing scams going on in the UK the USA and China.....
The priority remains protecting the parasitic bubbles whether rural or not.
 

You can count on the bailout pork solution being top drawer in Bill's office....something designed by the parasites to benefit the parasites...sold by the govt as the best thing to ensure the productive rural sector keeps on trucking....blah blah blah.
The rush of loot into NZ$ and into Auckland housing prices, has at least ensured the banking residential credit bubble will not pop for a while yet....but the rural sector is a festering ulcer.
 

What about Letters of Credit? 
Okay in your eyes as this is effectively a debt obligation?
How do you propose to trade with the rest of the world?

Barter butter with the Ruskies for oil ....... now where'd that idea spring from .......
 
....... milk the Chinese ........ they're only getting dumb old milk powder , NZ will be getting electronic goodies ...... who's the stoopid one's now , huh !

Bit like when we traded Butter for Lada's.
Now that a great plan!
Barter for some of those great Chinese loc's that Kiwirail have got which have to run in pairs as the odds are that one will break down so carry a spare!!!!

Like Cuba of the South Pacific without the sun!!!!
At least all the classic cars driving around Cuba are now worth something.
Oh yes. WHEN I AM ELECTED I WILL DISCLOSE.........
Why not diclose now or do you have something to hide becuase if the masses new you wouldn't get elected?????

- you are using 'google mail' that's made in USA and is un-new zealandish - you should use a new zealand email provider!