NZ Farm Finance: Rural lending patterns under scrutiny by Reserve Bank
November 30th, 2009
The RBNZ is consulting with banks over their pattern of rural lending and will require them to change their model in coming months to take a smoothed, “through the cycle” approach, rather than the pattern of recent years of lending heavily in good times and withdrawing credit when times get tough. Deputy Governor Grant Spencer says “we weren’t particularly happy with the risk models the banks were using for rural lending.” According to the RBNZ’s latest Financial Stability Report, debt levels in the rural sector have doubled since 2004.
The central bank singled out highly leveraged dairy farms purchased in recent years, “perhaps in the expectation recent high dairy prices will persist for some time.” More intensive farms in less traditional dairy farming areas have “significantly higher cost structures than more established farms and the RBNZ says they may face a second year of negative cash flow. Some farms are holding too much debt and will be forced to sell some or all of their operations.”
Dairy farm sales in the past 12 months dwindled to 147, less than half the annual average of 430 between 1997 and 2008, and transactions are typically at “significantly lower prices.” Lending to the dairy sector now accounts for almost two-thirds of total agricultural lending outstanding. The stability report was completed before Fonterra increased its forecast milkfat payment.
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