Big dry to test farm savings ambitions

Will rising FMD fortunes hit a dry stone wall?


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The farm management deposit pool is getting close to matching the $8.5b farmers spend on farm inputs each year

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Seasonal conditions might be tough for a lot of farmers, but the rise and rise of Australia’s farm management deposit numbers shows just how financially healthy much of the sector has become in the past five years.

In the final year of the “millennium drought” in mid-2010, FMDs totalled about $2.7 billion, but now they are building towards three times that value.

The national FMD balance initially grew relatively sedately after the scheme was devised in the late 1990s to encourage farmers to put money away for emergencies or farm investment projects.

However, by the start of the 2017-18 financial year farmers had amassed almost $6.1b, and according some banking industry observers FMD savings will likely reach $7b at the end of this month.

To put that in some practical perspective, FMDs are getting close to matching the $8.5b farmers spend on major farm inputs – crop chemicals, fertiliser, animal health products, stockfeeds and fodder – in an average year.

Another $1b rise?

Almost a quarter of those funds were invested with the National Australia Bank, whose agribusiness general manager, Khan Horne, has forecast another big billion dollar rise for 2017-18.

He said despite some draw down on reserves, which would likely gain pace again after July, recent farm earnings trends were still strong enough to drive FMDs above $7b by June 30.

Funds going into fixed FMD deposits must be held for at least 12 months to qualify for tax advantages offered by the scheme, which lets farmers exclude fresh deposits from their assessable income in the year the money is banked.

The funds (up to a maximum of $800,000) are taxed at the farm’s assessable income rate in the year money is withdrawn – invariably when seasonal conditions or markets have been tough.

Mr Horne said considerable funds were also still going into other savings accounts, or being used to pay down debt.

We’ve certainly seen good savings growth in the past five years, but I think the FMD trend is highly unlikely to get to $7b this year. - James Finlay, Neil Clark Business Intelligence

But agribusiness financial analysts at Victorian firm Neil Clark Business Intelligence, are less confident, particularly after noting how little of the national winter crop area received good rainfall and yields in the past year.

“We’re still seeing record livestock and wool prices, but the grain sector is traditionally a big contributor to farm savings,” said managing director, James Finlay.

“It wasn’t a big winter crop last year and planting season rainfall for the 2018-18 crop has been below average for 85pc of the rain-grown winter grain area.

“We’ve certainly seen good savings growth in the past five years, but I think the FMD trend is highly unlikely to get to $7b this year.

Keeping cash in hand

“I hope I’m wrong, however, given the way the season is panning out there’ll probably be more requirement to have spare funds on hand.

“We’re going into a pretty dry run, if current indicators are correct.”

Mr Finlay also observed many livestock producers, particularly wool growers, were still taking the opportunity to spend their improved earnings on new equipment and renovating pastures and infrastructure, which did not necessarily leave too much spare to salt away in the bank.

“However, regardless of whether the FMD trend rises as much as it has in the past two years, it’s a good indicator of how much healthier the farm economy really is.”

He said FMDs typically represented just 15 per cent of the farm sector’s total liquid assets, suggesting farm accounts could currently hold up to $46b.

“And despite some seasonal challenges at the moment, the market fundamentals are still very strong for farmers,” he said.

The big rise in FMD savings activity began in 2011 when the total broke $3b for the first time, then climbed above $4.1b by 2014, and to $5.1b two years later.

In 2016-17, as cattle and lamb markets surged, and a big grain crop was harvested, and new-found market life was breathed into the wool industry, FMD savings grew by a full $1b to break through $6b.

Funds drawn down

By April deposits had shrunk back to $5.16b – a significant, but not an unusual drop, given many farmers have been drawing on funds for 12 months to pay for farm investments and some drought-related spending​.

The traditional end of financial year build in FMD accounts generally hits in June.

NSW and Queensland producers have the most money stashed in FMD accounts – $1.35b and $1.16b respectively.

Australia-wide there were more than 49,300 FMD accounts registered in  April, however that total number of accounts does not indicate the number of primary producers participating in the FMD scheme as many may have multiple accounts.

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