The big banks’ belated move on farm management deposit interest offset deals for farmer borrowers could, in theory, save the drought-stressed sector nearly $500 million in the coming year.
The bulging $6 billion-plus reservoir of national FMD savings currently set aside by primary producers in preparation for emergency drought costs and other major farm expenses represents a massive national pool of interest-generating funds which could help dilute rural debt costs.
Although term deposit rates are relatively modest, at about 2.5 per cent, farmers will now be urged to use their FMDs to help trim back their debt load.
Banks have suddenly bowed to public pressure, promising producers discounted interest deals on borrowings based on FMD earnings.
The option to offset loan costs using FMD interest gains – similar to offset contracts home buyers enjoy when linking their savings and mortgage accounts – was approved by the federal government back in mid-2016.
Yet, until a month ago just one farm lender, Rural Bank, had made the offset offer possible to its customers.
Offset account challenges
Major lenders had argued the practicalities of linking FMD accounts (available to individuals only) with typical farm business loan accounts (generally held by partnerships, companies or trusts) were too complicated for their broad loan packages or computer software systems to cope with at this point.
One agribusiness executive said his bank faced a $10m outlay to build the technology required to automatically calculate FMD interest offset adjustments.
However, as national attention on the drought and dwindling farm cash flows heightened last week, Commonwealth Bank, Rabobank, Westpac and ANZ followed National Australia Bank’s July move, promising to make credit adjustments or create offset facilities for customers with eligible FMDs and business loans.
The details of each bank’s offer, including who qualifies, are still unclear, but farm finance specialists expect some will provide offset-style options for farm partnership borrowers, at least.
“The change in strategy on FMDs came pretty quickly in the end, so I think quite a lot is being made up on the run,” said one commentator.
Observers are also pondering how any quasi offset deals will be calculated and whether the options may even be too complex to attract farmers, especially if FMD balances start shrinking as the drought lingers.
However, depending on the size of their FMD balance, the rate relief deals could compound into a handy sum at a time when there is less cash flow to put towards repaying Australia’s $60b farm debt.
Director with NSW rural accounting firm Boyce, Linda Mackellar, said assuming an offset-style deal was available to “mum and dad” partnerships, current FMD interest adjustments may shave about $5000 from a typical (5pc rate) loan, if the couple had term deposits of $100,000 each.
“That’s not a great amount, but it’s still money saved and it goes towards reducing your debt at a time when little else may be coming in,” she said.
“If each partner had the maximum allowed in FMDs ($800,000), the saving would be around $40,000 – quite significant.”
Rural Bank estimates the $20m its NSW customers hold in FMDs linked to about $60m in loan accounts now generate offset savings worth about a $1m a year.
Our customers have a more robust balance sheet as a direct result of this option
“There’s definitely a measurable cost to the bank to provide the offset option – about $1.5m last financial year – but we think it’s the right strategic decision,” said chief financial officer, Will Rayner.
“Our customers have a more robust balance sheet as a direct result of this option, which is good for the whole sector.
“The purpose of FMDs is to make our farm sector more resilient.”
James Finlay at Neil Clark Business Intelligence, said FMD offsets had potential to cut almost 10pc from Australia’s total farm debt – about $500m – if they were widlely utilised against farm borrowings.
“Just the options mentioned in recent weeks are very positive, particularly if you still get a good farm income this season,” he said.
“WA croppers must be getting a bit excited by prospects of good yields, big prices and the chance to use their FMD savings even more effectively against their loan costs.”
Mr Rayner acknowledged while Canberra’s FMD offset rules were still quite restrictive, Rural Bank, had strong customer support for its linked fixed deposit and loan accounts, and farmers were talking more proactively about dealing with business variability.
Big FMD savings
Australia-wide farmers accumulated more than $6.6b in FMDs by late June – about $500m more than in June 2017 – despite the dry farming challenges of the past year.
Conveniently, given where drought costs are rising fastest, NSW and Queensland farmers had the most in FMD accounts – $1.75b and $1.3b, respectively.
Boyce’s Ms Mackellar, at Wagga Wagga, noted many southern NSW FMD accounts grew rapidly in the past three years, fuelled by buoyant livestock and wool returns and a big 2016 cropping year.
Even now, because of drought, many accounts may still increase further as producers were forced to sell stock.
She said the draw down on savings may not happen until good seasons returned and paddocks had to be restocked, crops and pastures planted, and while cash flow stayed subdued for a season or more.
However, Mr Finlay, expected the record high June 30 FMD total to fall to about $5.5b within months, based on past withdrawal trends.
Even without farmers tapping their FMD reserves to pay for drought-related costs, he said a big draw down was normal to cover farm expenses ranging from animal health and chemical inputs to essential farm equipment.
However, the usual end of financial year rush to put money away may be far less obvious in 2019 if drought persists.
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