MANY people will be aware of the recent QRAA finding that the debt carried by Queensland farmers has jumped nearly 20 per cent in two years and now averages over a million dollars. Almost certainly the situation is similar in the other states.
Various people have pointed out that this signals trouble as a result of stagnant or falling property values and depressed commodity prices. Banks become nervous when borrowers struggle to service their debts and collateral is losing value. Anecdotal evidence suggests there has been a jump in forced farm sales.
Our New Zealand cousins have been faced with this problem for some years and could give us a few pointers.
The debt carried by the average New Zealand farm increased substantially in the past 10 years. Dairy farmers led the charge; their debt increased four-fold, with the average production farmer now in hock to the bank for $2.2 million.
The NZ Reserve Bank has been expressing concern about the situation for several years, last year noting that banks which had over-stretched themselves while lending to the rural sector had been "very lucky" dairy prices rebounded.
The underlying issue is land prices. The high debt is a result of high commodity prices being capitalised into land values in the dairy boom years before the global financial crisis. Despite being well below their peak, in 2009-2010 the average price per hectare of New Zealand dairy land was $25,000 while in Australia's dairying capital, Victoria, it was $12,000.
Markets have a way of sorting these things out. Farmers who have borrowed too much money can inject more capital (by selling other assets), increase their income (by changing their enterprise mix or generating off-farm income), reduce their cost of production, or sell the farm.
If a sale is forced the seller may end up with nothing, the banks may not get all their money back and the bank’s shareholders may receive reduced dividends. That’s part of the creative destruction of the market system. The farm gets a new owner who will hopefully have less debt and be more viable.
However, there is another aspect to it. Potential buyers in New Zealand are very unlikely to include foreigners. The acquisition of farms greater than 5 hectares by foreigners is subject to review by the Overseas Investment Office.
This is quite a fraught process based on the highly imprecise notion of “benefit to New Zealand”. Intending purchasers must present a submission to prove this benefit, which is usually made public. Vendors face bureaucratic rules including a requirement to advertise the property to locals first. Being willing to pay a higher price than locals is apparently not a consideration.
There is also no certainty that a decision will be forthcoming within any particular time period. The OIO recently took two years to approve the acquisition of some major dairy farms by a Chinese company. And that decision was appealed in the courts.
Quite a few people, among them New Zealand Federated Farmers, believe New Zealand is the loser in this. Without the capital that foreign investors bring, it is difficult to see how the dairy industry can escape its massive debt trap. Nobody seriously believes dairy products will return to pre-GFC prices any time soon.
Without foreign capital there is a distinct possibility of a prolonged recession in the industry as creative destruction takes its toll. Eventually a new equilibrium will be found, but there will be plenty of pain in the meantime.
Could a similar thing happen in Australia? Not under current rules concerning foreign investment. Unlike New Zealand farmers, our farmers with an unsolvable debt problem are currently free to offer their property to the highest bidder, wherever they might be in the world. The chances of being forced to sell at a giveaway price are much less.
But there is considerable pressure for Australia to go down the same path as New Zealand, with foreign investment in farm land subject to a national interest test. Calls for “transparency” or knowing “who is buying into our communities” are simply a precursor for this. It a short step from knowing “who” to demanding “why”.
Some of this pressure is coming from farmer organisations, which raises the interesting question of whether they are properly representing the interests of their members if it means locking them into a debt trap. Somebody has obviously pointed that out to New Zealand’s peak farmer organisation.
David Leyonhjelm is an agribusiness consultant with Baron Strategic Services. He may be contacted at firstname.lastname@example.org