Heightened concern that 2014 will see significant increases in interest rates adding to farmers' biggest bill

Heightened concern that 2014 will see significant increases in interest rates adding to farmers' biggest bill

Despite successive surveys suggesting that more farmers are paying down debt than increasing it, agricultural debt continues to grow.

The reason in the main is that the small proportions of farmers increasing their debt are increasing it by more than the amounts paid off by the larger proportion of farmers who are reducing their debt.

At the end of 2013, New Zealand agricultural debt stood at almost $52 billion.

With annual interest on that debt between $3 and $4 billion, it is hardly surprising that bank interest is the largest expense for many farms. The Reserve Bank is widely expected to increase the Official Cash Rate from its record low of 2.50% on March 13.

In its mid-season confidence survey, Federated Farmers says while debt sits at fourth on the table of biggest issues for farmers, there is heightened concern that 2014 will see significant increases in interest rates.

After huge growth in farm debt during the 2000s, the global financial crisis saw banks become more conservative in their lending and farmers themselves becoming more cautious about debt.

Agricultural debt dropped slightly from late 2010 to the end of 2011 but growth resumed in 2012 and the debt since then has increased by over $4 billion.

Federated Farmers says it is keen to ensure that banks continue to support viable businesses and sound propositions and they should be transparent setting interest rates.

It also supports the development and maintenance of strong relationships and open two-way communication as the best way to avoid or address any problems.

Two thirds of agricultural debt is held by dairy farmers and a net 35% say they expect to reduce debt over the next 12 months.

Meat and fibre and grain and seed have more farmers expecting to reduce debt than to increase it.

This suggests, the report concludes, while dairy farmers intend to use some of their higher payouts to reduce debt, this is a luxury not so readily available to other farmers.

All regions had respondents expecting to reduce their debt rather than increase it but there was considerable regional variance.

All the South Island regions had significantly more farmers expecting to increase debt than is the case in the North Island.

Taranaki-Manawatu is the region with the highest net debt reduction, with a net 37%, followed closely by Waikato-Bay of Plenty (35%) and Auckland-Northland (33%).

Canterbury and Otago-Southland are well behind with a net 11% and 12% respectively.

Compliance costs

Regulation and compliance costs are the biggest single concern to farmers.

Costs relate mainly to regional planning where a number of regions have recently implemented or are implementing plan changes around water quality (including nutrient) and/or water allocation.

Other regulatory issues mentioned by respondents were occupational health and safety, employment law and  national animal identification and tracing.

Concern about staffing is at a record high reflecting a shortage of skilled and motivated labour while concern about input costs was at a record low.

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In theory debt should come down...
In theory there is no difference between theory and practice. In practice there is.
Yogi Berra