Banks dismiss debt fears

10 Feb, 2014 03:00 AM
The banks are warning more and more clients they've slipped outside the debt guidelines

THE banks insist Australia's rural debt meltdown doesn't exist, but others close to the farm finance sector say at least one in every three farming enterprises is now in trouble with a debt blowout, or soon will be.

Drought in eastern Australia has made a precarious situation worse in the past year.

But the big dry isn't the only problem says an accountant representing many big farming businesses.

Brisbane-based Brendan Vaughan said farmers had spent the past decade losing the terms of trade battle against rising farm costs while struggling with poor earnings, higher cashflow expectations from their banks and static or sliding land valuations.

Even operators who had healthy commodity earnings and good debt-to-equity positions two seasons ago were now experiencing real financial stress as their cashflow shrank, farm equity eroded and banks tightened the purse strings on loans for operational expenses like fuel, fertiliser or stock feed.

"The banks are warning more and more clients they've slipped outside the debt guidelines," said Brisbane-based Mr Vaughan, a director of national accountancy group Williams Hall Chadwick.

"I think the problems facing our rural client base in from Victoria to Queensland and the Northern Territory and WA are as bad as I've seen in 30 years - and our clients include some of Australia's largest family-owned farming enterprises," Mr Vaughan said.

"I'd estimate 30 to 40 per cent of rural producers are in trouble.

"Even if you don't have debt today, if you're involved in ag you will have debt in five years."

Rural Finance Round Table Working Group chairman Rowell Walton said many of Australia's bigger, more productive farm operations seemed more at risk of sinking under the weight of debt than mid-scale operations.

The loss of those big players would seriously undermine the industry's productive output, long-term morale and the economy.

"We're now suffering a hang-over from the pre-GFC days when lending conditions everywhere were far more generous and farmers were actively encouraged to borrow more to expand," he said.

"It's turned into a costly problem for the banks, too - they've got a couple of billion in loans that just can't be paid off and they don't really won't talk about it publicly."

But the banking industry is scoffing at suggestions that Australia's $60 billion-plus rural debt now features an increasingly large volume of bad or doubtful loans that won't ever be repaid.

Australian Bankers Association (ABA) policy director Stephen Carroll said less than 1pc of farming sector loan repayments failed to occur within 90 days during 2012-13.

Agriculture's repayment record was better than other sectors of the market, he said.

Recent research by the Commonwealth Bank of Australia (CBA) has also shown that farm interest payments and the risks of financial distress for farm businesses have not really risen above levels of 20 years ago.

CBA noted only about 6pc of broadacre farms surveyed by the Australian Bureau of Agriculture and Resource Economics and Sciences (ABARES) had farm equity levels of less than 70pc and repayment to earnings ratios of more than 15pc.

"Unfortunately some industries are under pressure and there's some genuine discomfort, particularly the beef sector hurt by drought and trade cessation issues, and dairy farmers have struggled with low prices," said the ABA's Mr Carroll.

"But there's not an unusual problem with agricultural debt across the board."

He said claims that lenders were on the verge of losing $5b to $7b or more from bad agricultural sector debt were highly inaccurate.

Last year's bad loan losses in the farming, aquaculture and forestry sectors probably totalled nearer $700m.

Andrew Marshall

Andrew Marshall

is the national agribusiness writer for Fairfax Agricultural Media
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Top Ender
10/02/2014 9:26:54 AM

"Recent research by the Commonwealth Bank of Australia (CBA) has also shown that farm interest payments and the risks of financial distress for farm businesses have not really risen above levels of 20 years ago."And 20 years ago we had more farmers than today. What happened to those Farmers? Oh yes that is right, High interest rates caused "industry consolidation". This time around lax lending practices will be the cause of further "industry consolidation". Leading to not only less farmers, but less rural towns and employment opportunities in Rural Australia.
10/02/2014 2:23:25 PM

In a commercial world not every business will survive. If all businesses are supported to survive, there is no reason to try, work hard or innovate.
Bushie Bill
10/02/2014 4:28:16 PM

Thank you, Joe, for a breath of economic rationalist fresh air.
10/02/2014 6:04:11 PM

i agree Topender, the effect on small and larger regional towns is mostly lost in this debate. Agriculture fuels a large amount of secondary economic activity
10/02/2014 6:49:35 PM

That's why your beloved banks needed a guarantee from the rba even before things got tough hey broker bill, how about the cartel play fair.
tim from oakey
10/02/2014 7:35:33 PM

Well said Top Ender.
10/02/2014 7:51:14 PM

Good point Joe. Natural attrition is as important in business as it is in nature.
10/02/2014 9:11:31 PM

Everyone needs to pull their head out of their essential orifice. Where I live we have people working with grazing families to assess the strength of their businesses. They tell me that 1/3 of those business's are seriously stressed or already in asset management. They also tell us that without big changes in the industry that within two years we will be at risk of loosing our best producers as well. People like bushy bill haven't a clue and those parasite bankers will do anything to hide what their lending practices have contributed to. We are being raped by the system and most couldn't care!
11/02/2014 8:14:48 AM

Geronimo, natural attrition happened in the Australian car manufacturing industry. Is that what you really want to happen to Australian farming?
Bushie Bill
11/02/2014 1:42:48 PM

So now we have the myth of excess debt to put to bed, along with other myths such as food security, foreign ownership, the principle of "you owe me a lifestyle because I am a farmer". The list is endless and only limited by farmers ability to determine new and exciting rip-off schemes.
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Why do they forget the small producers they are the backbone of the industry. What. Did this
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Good these guys will be able to help the farmers they are treating like second class peasants.
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Lets' hope Troy Grant doesn't Delforce's website or it will be yet another NSW