Banks change tune when talking dairy debt
Farmers who have dealt with the same friendly face from the bank for years are finding a pair of suit-clad strangers at the farmgate as banks switch tactics in tough times.
Federated Farmers Waikato provincial president Chris Lewis said the organisation has noticed a change in the way the Australian-owned banks are dealing with farmers as more find themselves facing tough conversations over growing dairy debt.
The moves come as Fonterra posted a lower than expected forecast payout of $4.25 per kilogram of milksolids for next season, well below the estimated break-even figure of $5.25. Total dairy debt has spiralled to $40 billion, with more than half of that loaded on to 20 per cent of farmers.
If a known face comes to the farm, the financial situation is salvageable, Lewis said.
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But if it's all new faces at the gate, the bank is looking at mitigating its losses.
These tougher conversations tend to happen with two people, as the bank is aware it needs to both support the farmer but also provide safety for its employees, he said.
"These are not very pleasant conversations to be had. And when you are talking about losing a farm, you are usually talking about people losing the family home as well. It's not like a business in town. It's a lot more personal," Lewis said.
Although Lewis is only aware of a handful of these conversations being had, come July, it will be a different story.
"Winter is when everything has dried up and there is no money to be made. That's when reality sinks in."
It was the same when the Global Financial Crisis hit in 2008 - there was a delay between the beginning of the crisis to when forced and reluctant sales came on the market, he said.
Only 52 dairy farms have been sold so far this year, compared with 97 during the same period last year.
Lewis predicts a spurt of farms will come up for sale in spring - more than the usual.
Business adviser and accounting firm Crowe Horwath head of corporate agribusiness Hayden Dillon believes a combination of the dairy downturn and the bottom falling out of the property market in Australia has led to more tough conversations between banks and farmers.
The banks now realistically have to think what happens if there is a third year of loss in the dairy sector, he said.
And how they go about these conversations has to be done with tact, Dillon said.
The conversations where farmers are meeting with people they have never met before is because the debt is being transferred to another part of the bank, he said.
"So they are probably introducing them to someone who is looking after that debt."
Dillon pointed to high dairy conversion areas like South Waikato, Southland and Canterbury as where the brunt of the downturn will be felt.
Reserve Bank Governor Graeme Wheeler agreed. The vulnerable places are where there is a high level of debt due to dairy conversions and investment in irrigation.
Dairy debt in New Zealand had risen exponentially since 2002, from $12 billion to $40b, he said.
"Half of that debt is owed by 20 per cent of the farmers," Wheeler said.
The Reserve Bank has been stress testing banks' ability to ride out the dairy storm.
It is important to remember dairy debt's massive rise and that the majority of the debt is concentrated in just a few areas of the country, he said, reiterating Dillon's highlighting of conversions and irrigation.
"You get other parts of the country where farms have been in families for generations and there is not a lot of debt."
Therefore, Wheeler is confident that the banks are able to ride out the downturn.
"We have done quite a lot of stress testing with the five major dairy lenders and we've done some pretty tough scenarios in terms of what if dairy prices did the following and what if farm prices fell significantly.
"We are confident that the banks have sufficient capital backing to ride through a very difficult scenario."