Gates close on farming debt law
New Zealand has one of the most indebted agricultural sectors in the world and falling commodity prices are making banks take a sterner line when farmers seek to refinance, the Reserve Bank is warning.
The November Financial Stability Report from the Reserve Bank painted a portrait of a heavily indebted farm sector, or as Federated Farmers president Bruce Wills terms it: "The most indebted farming industry on Earth."
Falls in commodity prices, the result, in part, of growing world production levels, has led to debt pressures.
The Reserve Bank reported debt in the dairy sector increased from $11 billion to $24b between 2003 and 2008.
"Dairy debt accounted for around 10 per cent of aggregate bank and non-bank lending and 63 per cent of lending to the agriculture sector. Almost half of this debt was held by the most indebted 10 per cent of farmers, leaving those farmers highly exposed when milk prices fell sharply in the wake of the global financial crisis."
Around a quarter of all farm debt at the end of 2010/11 financial year was in loans. There was a loan to value ratio of more than 80 per cent due to the decline in the price of farms.
This, the Reserve Bank said: "Is likely to make banks less comfortable forbearing on troubled operations."
"Under the current Fonterra payout forecast of $5.65-$5.75 for the 2012/13 season, approximately 36 per cent of dairy sector debt would be held by operations with negative cash flow if farm working expenses remained unchanged.
"This would increase to 64 per cent of debt if the payout fell to $5."
"This would increase to 64 per cent of debt if the payout fell to $5." But one mechanism that could deliver at least a partial solution to this national threat has been rejected, despite being advocated by Government MP Ian McKelvie.
Farm debt mediation laws are operating successfully in Canada and Australia, but despite the scale of the farm debt problem here, there does not appear to be the political will to make mediation happen.
Last week hopes for a farm debt mediation regime, which would give farmers the right to opt for a mediated negotiation should they run into debt trouble with their bank, were dashed when McKelvie's proposal was rejected by the Government.
Debt mediation is being championed by Janette Walker, who blew the whistle on the sale of complex interest rate swaps by banks to farmers, sales which are now being investigated by the Commerce Commission.
Walker says a combination of banks' "reckless" lending, moves to require banks to hold greater capital, and the revaluation of farms means the pressure is going to remain on the most heavily indebted farmers for four to five years.
Walker said farmers here deserve the same right to mediation that has been granted by law to farmers in Australia, Canada and many states in the United States, and the evidence from the New South Wales Farm Mediation Act shows both lenders and farmers are benefiting.
The conclusions of research by the University of Western Sydney can be told in a string of numbers derived from interviews with farmers and lenders who had been through the mediation process.
The headline number? In three- quarters of cases mediation results in a settlement.
The university found: 100 per cent of lenders and creditors "agreed that the costs were acceptable", 86 per cent felt that the deals struck in mediations were fair, and no lenders or creditors felt farmers had an advantage over them in the mediation.
By contrast 50 per cent of farmers felt the costs were acceptable; 73 per cent said it cost them less than A$10,000 ($13,000), and 59 per cent said it cost $6000 or less. While 17 per cent of farmers were "fully satisfied" by the deal done in mediation, 36.5 per cent were "partly satisfied", and 43 per cent "not at all satisfied". Seventy-one per cent of farmers felt the banks had an advantage in the mediation.
Farmers reported the main outcomes were refinancing with another lender (37 per cent), the lender allowing more time to pay (27 per cent), the lender writing off part of the debt (23 per cent), no settlement (19 per cent), the farmer sells real estate (16 per cent), the farmer sells other property (12 per cent), the lender sells real estate (10 per cent), surrender of real estate to lender (8 per cent), lender refinances farm debt (6 per cent), the lender sells other property (4 per cent), farmer bankruptcy (4 per cent) and the surrender of other property to lender (2 per cent).
The results do not indicate enforced mediation is causing issues for lenders. Nor does it prevent farmers from leaving or being put off the land.
In fact, when asked whether a lender would recommend mediation to another lender, 100 per cent said they would.
Mediator David Bogan, who works on both sides of the Tasman, said bank hostility to enforced mediation has vanished.
"The NSW Farmers Federation and the banks in Australia fought the legislation tooth and nail, and when it came in and began operating very successfully they then did a complete about-face and said that it was their idea in the first place, and how great it was!
"They thought they would lose control," he said. "The opposite has happened."
For farmers, there also seem to be gains. However, it may be that the university's findings overstate the true level of support for the mediation as some farmers refused to participate in the study because they still felt too "emotionally fragile".
Depression, suicide and marriage break-up are big threats for farmers faced with loss of home, business and standing in the community.
It seems that in mediated negotiations farmers do not feel so alone, and that farmers feelings are better recognised, allowing them to focus and get down to business more easily.
However, not everybody here is convinced.
Federated Farmers president Bruce Wills fears the introduction of such laws would result in higher costs for loans and reduced lending.
Walker dismissed that concern, saying research both in Canada and Australia proves that implementing and oversight of debt mediation is very cost effective for both the banks and farmers, in fact, banks comment that debt mediation saves millions and helps avoid the use of receivers.
"One CEO of a major New Zealand rural bank has stated to me that he would be comfortable with the introduction of a debt mediation bill in principle," Walker said.
And, she adds, Canadian authorities report no increase in interest charges to farmers as a result of the regime there.
"The supposed cost to other 'good' farmers in terms of higher interest rates has no validity," she said.
Walker's argument is that such mediation is happening on an ad hoc basis already, and making the option of mediation mandatory would only write into law the pledge in the banking code to be fair and reasonable in dealings with borrowers in default.
Walker acts for farmers in negotiations with banks, and reports that deals are being done.
Deals with farmers encumbered by interest rate swaps have included interest rates on loans being dropped, chunks of debt being forgiven, and swaps being removed with lowered break fees, or no break fees at all.
Some argue there may be a better way than passing new laws.
Julie Jonker from the Northland Rural Assistance Trust favours voluntary mediation and supported negotiations. She says the banks do pay the costs occasionally when someone from the Northland trust is supporting the farmer, and praises their willingness to do deals. But, she says, a more sustainable model of funding and nationwide coverage is needed.
Wills favours extending the Banking Ombudsman scheme to provide a mechanism to hear farmer complaints, though Federated Farmers does seem to have one foot in the enforced debt mediation camp.
Its submission to the banking code of practice review in December 2010 read: "Federated Farmers recommends that the Review of the Banking Code should consider whether a farm debt mediation service should be introduced in New Zealand."
The code reviewer, Wellington lawyer Stephen Franks, rejected that suggestion, instead recommending to the banks that they consider voluntary mediation in individual cases.
Banker's Association chief executive Kirk Hope said the association does not have a public view. "If that's where the conversation is going, we will engage in that process."
Hope said there was more space for farmers to complain through the Banking Ombudsman Scheme than people realised, and felt with mediation already a voluntary option, there was no need for legislation.
Wills also makes the point that with farm sales depressed, there is an urgent need to allow foreign capital to find its way to New Zealand farms to lift prices. He is frustrated by the national antipathy to farm sales to overseas interests.
It may be that even though farm mediation laws appear to work well overseas, the New Zealand case is not pressing enough.
In New South Wales, Bogan said, the act was created when terrible droughts put farmers under incredible pressure, and the "warfare" that resulted could not be ignored.
"Farmers were burning their homes and driving their equipment into rivers," he said. "It was almost like open warfare."
That warfare is not happening here, though the Reserve Bank said pressure on banks to end their forbearance is mounting.
Bogan said the silence from suffering farmers is to be expected. While Australians make a noise, "in New Zealand things happen in the dark.
"People could be losing their properties and we just wouldn't know."
McKelvie told Sunday Star- Times that the mediation idea continues to "float around" Parliament, and may still have a future.
"I think if the banks were to be on-side with this thing, I'm convinced there would be no issue in this going through. They would need to be comfortable that it would work, he said."
There is also support from Labour MP Damien O'Connor, who has been critical about interest rate swaps sales to farmers.
NZ First's Richard Prosser is also in support, saying the time to consider it is now before the debt mountain is transformed into a crisis.
"I suspect it has been dismissed on ideological grounds. It is not the kind of thing that fits in with a neo-liberal agenda."
Sunday Star Times