Little growth in lending for ag

Chaperon economist Gordon Stuart takes a dive into the latest banking statistics and what they mean for agriculture.

The starting position is OK, for what is obviously going to be a difficult season ahead. But farmers need to be alert and proactively managing challenges. External factors such as commodity prices are beyond control, but cost levers should be getting pulled aggressively now and plans being made.

Debt

There has been little growth in lending over the 6½-year period other than to kiwifruit and wine. Banks have demanded increased amortisation from the dairy sector which has flattened as prices have come off their peaks, and farmers have increasingly used revolving credit facilities to match seasonal needs.

Agriculture lending stock increased by $272m in July (0.4%), driven by a $275m (0.7%) increase in dairy lending. Dairy lending annual growth has risen from 1.7% to 2.2% and will have an upward trend as cash shortfalls are met by debt.

The reduction in dairy debt over the past seven years has put the dairy sector in a relatively better position to absorb a bad season. This season is that bad season.

Banks hate surprises. Have a clear plan you can demonstrate to them as to why you need them, what caused the need, what you are doing about it and how they will be repaid. Having facilities with headroom in tough times is vital.

For debt-dependent businesses the banking relationship is a risk that ranks as high as any other and it needs to be managed accordingly.

Deposits

Agriculture sector deposits have risen from $6.6 billion in December 2016 to $8.7b in July this year. However, deposits are down from a $10b peak in April 2022, which suggests working capital is being eaten into. Debt up and deposits down is not a great combination.

Non-performing loans

Bank non-performing loans are stable at around 0.5% of total loans. While interest rates have moved up, many home borrowers upped their principal contribution rather than taking the cash benefit of lower rates, which has put them ahead of their mortgage schedules. Higher interest rates are now impacting, though, but borrowers have bought some time.

Agriculture non-performing loans are 1.3% of total loans ($800 million) with dairy $450m and non-dairy $350m. Nondairy has been the mover in the past year, doubling from 0.7% of total loans to 1.4%.

Xero’s small business insights data shows relatively stable days to pay, at about 23 days for agriculture, forestry and fishing industry. Six years ago, days to pay were around 27 days.

This series will provide one indication of stress and needs watching given the combination of dairy payout, China risks, the impact of cost inflation, Cyclone Gabrielle and its wet weather hits to horticulture, and the red tape/costs bludgeoning farming businesses.

Bank funding costs

Longer-term wholesale interest rates have risen around the globe and, as expectations build, central banks will need to keep interest rates elevated for longer.

Those with long memories will recall previous periods of inflation. It does not miraculously disappear. Central banks dish out pain to force its elimination.

Bank funding costs are also rising due to a switch. More deposits are being lodged in a term deposit as opposed to a savings or transaction account.

Deposits with banks have risen $15.3 billion in the past year. Transaction balances are down $14.3b, savings balances have fallen $5.6b and term deposit are up $35.2b. Term dweposits rose $3.6b in July alone. Better rates for depositors add to borrower woes because they require an adjustment on the asset (lending side) of bank balance sheets.

Bank margins have also been rising, and it often pays to get an expert to make sure you are being priced correctly. Ten basis points on a $10 million loan is $10,000 a year.

The investigation into bank profits

The Commerce Commission is investigating the retail side of bank profits. Retail banking accounts for about 40% of bank profits. Agriculture sector leadership groups should be calling for this investigation to be broadened or for a followup one on the business/farming side.

The bottom line

The coming season will be difficult. There is no point sugar-coating things. As well as cash-flow pressures, there are growing geo-strategic pressures internationally and one of our largest export markets, China, is at the epicentre.

There are some shining lights. Many farmers will welcome the prospect of a new government, which polls have been pointing to. New Zealand’s massive current account deficit shows we need to earn more and spend less.

Farming is the earning backbone of the economy and will be needed over the coming decade. The decline in the NZD/USD to below 0.60 is a market force saying earn more and spend less. It will not happen overnight but will need to happen.■