What is really happening with rural lending?

with Don Fraser
Fraser Farm Finance

What are they not telling us about farm debt, debt-to-asset ratios and repayment of loans?

Firstly, there have been big changes in the desire by rural bankers to back the farming sector. In the past you could borrow any amount at interest only as long as you were inside the 66 per cent debt ratio, you could prove you could service the debt and had the proven record and ability to do so.

The interest only was like ‘renting’ the money, the cost of debt was low and any profits were poured into expansion, development, or the purchase of other assets.


Historically, debt per kilograms of milk solids – which is one of the criteria – got up to $30 to $33 per kgMS depending on the cost of production, location and so on.

So, 300 cows producing 100,000 kgMS could borrow up to about $3 million interest only and generally included all other debt costs and no leases.

In parts of New Zealand, more particularly the West Coast and Northland, farms could be purchased for around that $26 to $30 per kgMS.  It is clear that these less sought-after and somewhat difficult locations have seen a drop in value to around $20 per kgMS, which often equals the debt. So basically they are insolvent and there are many farms in those locations which are just that, insolvent.

The better localities have held their values, but the word is they are back by $10,000 per hectare or about 20 per cent. Put on top of that the changes brought in by the Reserve Bank and the need to ‘amortise’ or repay the debt with principle and interest makes it even harder. If your debt is at five per cent interest say, repaid over say 20 years, it will see your debt cost jump to nearly 10 per cent. In addition, the principle part of the debt costs is not tax deductible.

So today, the other thing that is going on, even with the talk of an $8 payout, is the banks are no longer ‘in love’ with farming. They are restructuring their rural loan portfolios and even making rural bankers redundant.

The new normal

Apparently, if you want to borrow for agriculture their ratios are much reduced, making it even harder to buy farms. Now they say they are ‘open for business’, but the debt-to-asset ratios are a lot less and you have to be repaying principle on all loan amounts and all criteria have hardened.

Evidently, one of the main reasons they want a reduced rural portfolio is they say they are making no money out of them.

Say a $3 million loan at five per cent interest only, with no add-ons, such as vehicle finance, overdrafts, etc, make for very poor pickings for the bank.

So, if you find yourself under pressure to repay debt, principle and interest over a number of years, the bank is putting pressure on you and your trusty old rural banker has vanished, you need to realise that this is the new normal, $8 payout possibility and all.

The remedy or best practice is to realise charges are coming and embrace them and try to work with your banker and consultants for a mutually acceptable outcome. The times sure are a changing and none so much as rural lending.

Disclaimer: These are the opinions of Don Fraser of Fraser Farm Finance. Any decisions made should not be based on this article alone and appropriate professional assistance should be sought.

Don Fraser is the principal of Fraser Farm Finance and a consultant to the farming industry.  Contact him on 021 777 675.



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