Plain talk on rural debt

20 Oct, 2014 01:00 AM
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Press releases were the only visible outcome from the recent rural debt roundtable to date

A NEW economic publication urges Canberra to immediately address the current rural debt crisis issue before too many more farmers are forced off the land.

Subprime Agriculture, and Australia, by Queensland University of Technology (QUT) business analyst and senior lecturer Mark McGovern, highlights recurring problems with government policy attitudes towards escalating farm debt.

Dr McGovern’s report says the historic focus on farm productivity over profit is a backward-thinking policy stance and the quality of bank financing is the elephant in the room that requires urgent action and less talk.

The publication says agriculture is the nation’s only “strongly competitive industry” but is in “deep trouble”.

“However, bankers, many industry leaders and others repeatedly deny problems while farm foreclosures rise rapidly and farm prices fall disastrously,” it says.

“As they send in the liquidators, banks improperly withhold important, previously available information despite repeated requests from Ministers and others.

“You might react that 'this is just the way of the world' but these are exceptional times.

“Systemic flaws and shared irresponsibilities underwrote the distressed loans that are the core of problems in agriculture, and elsewhere.”

But Dr McGovern’s report says it’s not just the bush that has such problems.

He said national economic conditions are deteriorating with per capita incomes falling and real interest rates still high.

“Well informed policy strategies and effective responses are needed quickly if Australians are to avoid needless losses of capacity and wealth destruction in the cities and the bush,” he said.

Speaking to Fairfax Media, Dr McGovern said the debt problems identified in his report have been building since 1997 but have now reached a critical pass.

“A debt deflation crisis - rising debts with incomes and asset values falling - is underway,” he said.

“Debt rises, which are exacerbated when penalty interest rates apply sit alongside widespread falls in farm land values and incomes meaning finances are fundamentally untenable.

“Apparent ‘rural book’ asset value devaluations by financiers at the end of 2012, the carry throughout of improperly constructed loans from failed financiers, and the removal, despite warnings, of Exceptional Circumstances interest rate subsidies last year without any transition strategy were inept, callous and sectorally ruinous.

“These stunning systemic malfunctions were compounded by market failures.”

At the recent rural debt crisis roundtable summit in Canberra, Australian Bankers Association chief executive Steven Munchenberg said the current debt level was $61 billion but talks would continue about the farm finance problems raised at the forum.

Howard era rural debt summit

Dr McGovern’s report also points to 1997 as a time when former Primary Industries Minister John Anderson convened a Rural Finance Summit in Canberra, similar to last month’s forum chaired by the current minister Barnaby Joyce.

“The thrust was similar to today,” the report says.

“Scale was the saviour and the message was that over a quarter of farmers must go.

“We overachieved - more than 40 per cent or 103,000 farmers went during the nine-year Howard-Anderson era.

“Such is the effect of oft-repeated economic mantra and bankers with open loans books chasing market share.

“The reality is economies of scale require enterprises to increase operational size, invest in the latest technology (such as limited-till farming and GPS navigation), employ advanced managerial systems and so on.

“Increased farm size increases capital intensity (as with fixed costs of larger machinery and equipment items).

“All these required funding, yet financial considerations were and remain essentially absent from policy and even industry discussions.

“Reports abound of minimally analysed loans, but understanding of actual situations and practices awaits a Senate or other responsible Inquiry.”

Recent roundtable outcomes

The recent Canberra roundtable agreed to gather more accurate and factual data on the size and scale of the rural debt problem and restart the national rural debt mediation process.

Mr Joyce also agreed to adjust the eligibility criteria for the government’s $700 million farm finance and drought loan packages to better target assistance.

However, Dr McGovern said press releases were the only visible outcome from the recent rural debt roundtable to date.

“It seems the current policy elite are unable or unwilling to competently advance industry or the national interest,” he said.

He said given their comments, it seemed banks don’t yet know the extent of rural financial stress.

“They should have such information already, and if they don’t, APRA (Australian Prudential Regulation Authority) should have already sent in the auditors.

“Also, a prudent RBA (Reserve Bank of Australia) would have run relevant analysis on the farm finance area.”

Dr McGovern said readily available policy solutions that would help stabilise the farm debt crisis, “without needless losses”, included a moratorium on non-agreed forced farm sales.

He also suggested stopping the clock on penalty interest rates; cessation of expensive and arguably exploitive actions by receivers and their agents, and cessation of directions to not pay suppliers.

Dr McGovern also believes the Senate Economics Legislation Committee needs to immediately proceed with its inquiry into the RBA Amendment - Australian Reconstruction and Development Board (ARDB) Bill.

He said while understandable, continuing delays in such an investigation are “a blight on the good reputation of the Senate”.

“Remember this is an inquiry and Senators will make their own minds up, or suggest alternatives, on the basis of the evidence available and over 140 submissions have been just sitting there for most of the year,” he said.

Dr McGovern also believes the APRA must immediately start a preliminary audit of bank farm-loan books, including for loans terminated in the last three years, with a goal to clarify the sectoral situation and whether adequate reporting to authorities and clients was undertaken.

He also called for the coalition’s Agricultural Competitiveness Green Paper to be released so stakeholders can see what income prospects might be ahead, to help remove needless uncertainty from the market.

Dr McGovern said he supports the ARDB as a potential solution to mitigating farm debt as it bring together “needed capabilities and insights to allow us to address major problems in timely and sensible ways”.

“It allows immediate stabilisation, orderly reconstruction and a basis for long term industry viability,” he said.

“It should work in conjunction with existing financiers and organisations and draw on existing talent to expedite resolution of financial problems within the financial system.

“It removes a liability from government, except for welfare and natural disaster.”

Download Subprime Agriculture, and Australia here.

FarmOnline
Colin Bettles

Colin Bettles

is the national political writer for Fairfax Agricultural Media
Date: Newest first | Oldest first

READER COMMENTS

Clarkie
22/10/2014 9:26:16 AM

Farming is not in “deep trouble” in Australia. There are pockets of serious farm debt especially in Queensland. In general our industry is in good health. Total farm income as measured by ATO rose by 14% between June 2008 and 2013. My estimates of farm debt from the analysis of RBA statistics rose by only 15% in the same period. Farmers need to borrow money to grow their wealth and prepare for inter-generational change. Farm Management Deposits rose by 29% in the same period; this is a good measure of industry health.
wtf
23/10/2014 6:58:28 AM

Those figures sound all warm and fuzzy Clarkie however I think u have highlighted an important point. Transparency of data is not there, banks don't release it, this already hints there is a problem. Perhaps it is in the breakdown of that data? 08-13 sounds good, but what about a longer term analysis, my instinct says it will be far different. Who owns those FMDs, are they people who bought the land many years ago when land prices reflected earning potential? therefore they have relatively no debt, how does that compare to people who are starting off today? What about farmer decline?
Qlander
23/10/2014 7:49:18 AM

When debt rises faster then income - that's problem.
LTF
23/10/2014 7:53:01 AM

Why can't people see the wood for the trees? Farm profitability is in the toilet. Look at the investment market and show us the return on investment offered from farms. It is in the toilet. What people fail to acknowledge is that we have allowed the Industrial Awards/penalties systems and other Govt regulations to run totally out of control. It impacts every aspect of costs from local Govt, to storage and transport, insurance, banking, power, fuel, chemicals, fertilizer, labor, machinery, repairs, etc. Until Govt, takes back the welfare component of costs from business, the slide continues.
Love the country
23/10/2014 8:23:47 AM

I agree with Clarkie, plenty of money out there in farming, BUT, only old money, and with farmers who started farming with a silver spoon.there are many more not doing well, drought, frosts, interest rates, bank fees you name it.we have the lowest interest rates on record but there's plenty of farmers still paying over 10.5 percent, on loans ( and they are low risk )
Geronimo
23/10/2014 8:49:32 AM

I agree WTF. Something smells about FMDs. Who owns the $3.2 billion? Lets have transparent information.
Jacky
23/10/2014 9:13:30 AM

Australian Agriculture is generally an inherited industry. Borrowing to expend is probably a healthy sign.
wtf
23/10/2014 10:08:37 AM

"on a trip to china we visited millers who told us the majority of wheat they use now is Canadian and US, a decade ago they were sourcing as much as 30% of their wheat from Aust, now our wheat is reduced in quality and yellower" Doug Clarke, WA Grains Group. I tend to agree with this clarkie as quoted, my interpretation is that farmers are not doing well in Aust and I think his quote says that. Do you agree Clarkie?
GFA
23/10/2014 10:49:55 AM

What I do know WTF is that since the demise of the AWB, our grain is no longer marketed. It is now just sold as an undifferentiated bulk commodity. Once a trader buys our wheat it loses all identity allowing the trader maximum arbitrage opportunities. All links between us as growers and the actual users of our wheat have been broken. Also Traders work on delivering lowest allowable quality to processors, whereas good marketers like AWB were totally intent on the maximum satisfaction of the processors to whom they sold direct. Under AWB our wheat had worlds best reputation for quality.

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I am in no position to comment on the issues between Culleton and the ANZ or the other farmers
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To MERELY enquire about getting a key cut to move a vehiicle that does not belong to you. Mr
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Growers might consider who they deal with a bit more. Sometimes, the best price comes with