Bankers warn more forced NZ dairy farm sales likely following payout drop

Friday 29th January 2016

Banks say more heavily indebted New Zealand dairy farmers will be asked to sell up as non-performing loans increase with lower forecast payouts.

DairyNZ estimates 85 percent of dairy farmers will lose money this season compared to 49 percent last season after Fonterra Cooperative Group yesterday followed other dairy companies in cutting its forecast farmgate milk payout. The drop of 45 cents per kilogram of milk solids to $4.15/kgMS for the 2015/16 season meant an $800 million drop in the industry’s dairy revenues or $67,000 less in cash revenue for the average farm.

Agri lender Rabobank has forecast cash flows will remain at low levels well into the 2016/17 season with global dairy prices unlikely to return to sustainable levels until late this year.

Bankers spoken to by BusinessDesk say they’re prepared to keep supporting the industry with long-term prospects still looking good. However, they and rural advisers say some of the most marginal farmers are having their debt capped with no further working capital supplied while others are being urged to sell.

One rural adviser working with loss-making farmers, who didn’t want to be named, said his clients are starting to have tough conversations with bankers that varied from ‘what’s your exit plan?' to 'what’s your action plan to reduce debt?'.

Federated Farmers dairy chairman Andrew Hoggard said he’d heard of farmers already exiting the sector and about others getting the “hard word” from banks about selling if they can’t reduce on-farm costs far enough. He said it was important to get independent advice.

“It’s better to be proactive and put yourself in the driver’s seat and make the hard calls yourself rather than wait for someone else to make decisions for you that may not be ideal if you had more time,” he said.

Dairy farm debt hit $37.8 billion in June from $34.6 billion the year before as farmers sought more working capital to cover their losses after last season’s poor payout, and the Reserve Bank has estimated about 30 percent of that debt is concentrated among 10 percent of farms. What's more, 11 percent of total dairy farm debt was held by farms with negative cash flow and loan-to-value ratios above 65 percent.

In a December update, the Reserve Bank said assuming all non-performing loans default, the top five rural lenders could lose between 2 to 14 percent of their dairy portfolio. But it said losses for the banking system should be manageable even under the worst-case scenario.

ANZ Bank New Zealand, the country’s largest rural lender, said the recovery was taking longer than everyone expected 18 months to two years ago but the industry’s long-term outlook remained positive.

General manager agri Ross Verry said some tough conversations are being had as two consecutive seasons of negative cash flows will see a “deterioration” in non-performing loans.

“We’re saying to people be very careful about their assumptions on their return on investment and payouts,” he said. “We know people have been, until recently, perhaps assuming $6 plus payouts in the medium-term but we’ve said publicly there has been a 25 to 50 cent cut in that, at least.”

Rural interest rates have fallen in recent years in line with the downward trend in the official cash rate, but despite the Reserve Bank yesterday indicating an easing bias due to low inflation, upward pressure is likely this year on rural credit margins.

ANZ’s Verry said that’s due to increased risk and wholesale funding costs rising steadily since the end of 2014, and more sharply recently, on global volatility.

John Janssen, head of agri for Bank of New Zealand which is the second-largest dairy lender, said “there was no way to paint that up” with rural interest margins likely to rise although they “won’t be massive increases”.

He still expects payouts to return to above $6 plus by the 2017/18 season but given this season’s payout drop and estimates next season’s will be a still unsustainable $5.20/kgMS, it means a higher percentage of clients will now never be sustainable.

Many had already cut their farming system costs as much as possible and sold non-core assets like beach houses, leading to more difficult conversations around selling their farms, Janssen said.

“Less clients now fulfill our funding criteria,” he said.

ANZ's Verry said there had been a small number of receiverships and forced farm sales in the industry of which his bank had been involved in “only a very few”. However, ANZ was starting to see more farming businesses under stress, he said.

“People should be looking at their business and finding ways to become profitable,” he said. “Banks will not necessarily fund 100 percent of those losses and farming businesses have to look at ways to close that gap.”

Rabobank, the third-largest dairy lender, said it will continue to support clients during the downturn.

General manager country banking Hayley Moynihan said she expected farm debt to peak in the 2016 calendar year because of the way milk payments are structured in the industry.

A small percentage of farmers will end up in forced sales and receiverships, she said.

“Some borrowers if they weren’t in a robust position to start with, could end up in that position,” she said.

BusinessDesk.co.nz

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