Kate Phillips, Agfarm Regional Manager SA
Around the grounds – December 2018
Well that’s a wrap for harvest 18. The continued wet weather, although a burden to harvest progress during the final few weeks, should lead to good sub soil moisture levels going forward into 2019. With good subsoil moisture comes weeds, thus many growers are out there getting on top of summer spraying to conserve as much of this moisture as possible.
Tightening on Rural Lending
In the last Agfarm Finance Newsletter we touched on alternative funding sources for input costs and cashflow management. We also alluded to the impact the Financial Services Royal Commission tabled by government in September is having on the finance sector. This month we’re going to take a closer look at the early impacts of the Financial Services Royal Commission drawing on industry sources and what it might mean for the agricultural sector, particularly broadacre farming.
Why did the Royal Commission happen? The Interim paper pointed to greed.
“Selling became their focus of attention. Too often it became the sole focus of attention. Products and services multiplied. Banks searched for their ‘share of the customer’s wallet’. From the executive suite to the front line, staff were measured and rewarded by reference to profit and sales” 1
Obviously, financing is a very important part of the Australian agricultural industry. Most farmers aren’t weekly, fortnightly or monthly income earners, and there is a heavy reliance on lending to fund investment and working cashflow requirements prior to selling their produce. ABARES agricultural lending data released in October 2018 found 95% of Australian farms are family owned and operated, with $70.123 billion of agricultural debt spread across 145,656 entities.2 The role of providing working and term debt finance has (and still does) traditionally fallen on commercial banking. However, as a result of the Royal Commission findings, lenders are reviewing their credit procedures and lending/profit making cultures which directly impacts traditional funding arrangements. We’re seeing tighter lending guidelines and lower loan to equity ratios, especially in rural areas; including regions which have ‘strong prospects and those that haven’t been touched by drought’. 3
“Tighter lending criteria the big banks have been putting in place for residential home loan customers have flown through to aspiring buyers of rural properties and acreages”. CEO of agribusiness Elders 3
So what does this all mean
Competitive, flexible alternative lending pathways are more common place today and are forming part of agribusinesses core funding mix. This is especially true of the younger farming demographic who don’t have the loyalty or can’t access ‘traditional banking’ lines of finance.
Younger producers are turning to residential home loans to buy their first farm because financing for agriculture has become too difficult to obtain in Australia. Queensland’s First Start Loan offers young farmers access to alternative funding arrangements. Since 2009, 439 First Start Loan applications have been approved valued at $1,686 million.4
So, while farmers are still using traditional lending avenues, they are now looking at alternative lending pathways for not only property and machinery purchases but for cashflow assistance throughout the year. The previously mentioned ABARES report showed working capital debt accounting for 37 per cent of average broadacre debt at 30th June 2017.2 This demand has seen an increase in alternate funding lines move into the agricultural industry to assist in continued investment and growth.
Over the last 10 years Agfarm has introduced three cashflow tools to help broadacre farmers with the challenges of cashflow management. First it was providing a cash advance on grain transferred into Agfarm Advantage. Then Agfarm introduced Agfarm Accelerate, a line of credit for input finance secured against future crop production. More recently Warehouse Cash was launched which gives users to ability to unlock 60% of the value of warehoused grain in cash.
Given the current scrutiny surrounding the traditional funding lines, it would be safe to speculate there will be more products coming to market to help feed this growing need for farm finance.
2. Department of Agriculture and Water Resources 2018, Agricultural Lending Data 2016–17, Canberra, October. CC BY 4.0. http://www.agriculture.gov.au/SiteCollectionDocuments/agriculture-food/drought/ag-lending-data-2016-17.pdf
3. Australian Financial Review, Simon Evans 14th Dec 2018
4. Australian Dairy Farmer “Young Farmers take on home loans” Matthew Cranson 2014
Industry Report – Agfarm’s agribusiness reporting pick for the month.
Reid Seaby WA Regional Manager | 0439 625 853
Kate Phillips SA Regional Manager | 0438 128 472
Anthony Hall QLD & NSW Regional Manager | 0400 873 777
James Ryssenbeek VIC Regional Manager | 0447 743 556