Managing collateral damage

Blaming banks for rural debt is like blaming McDonalds for obesity

FARMERS are where we are in Australia today because of the choices we’ve made. Business decisions that justify taking on debt given the geography, historical data and terms of trade for areas concerned are ‘ballsy’ to say the least.

If you want to enjoy the fruits of financial leverage, you have to be willing to pay the price. If the price you are prepared to pay doesn’t include your property, don’t write it in as collateral into a commercial contract with a bank. For some, this will be telling you how to suck eggs - for others, this may be a painful truth you are learning the hard way.

“A tough conversation is needed, not more emotive hype”

Last week seemed a week of wins for agriculture, farm businesses drowning in debt, the federal government and some vet from Toowoomba.

Barnaby Joyce put his foot down and shook a fist at the big four banks. One bowed and Australians saw the government that many love to hate finally get a run on the board. It was a win for the “shocked, humiliated and penniless farmers” that now live like “hunted refugees”. These were the words of Queensland veterinarian, Dr David Pascoe. You should read some of his eloquent tales of misfortune, spammed across Australian social media. With such fulsome narratives to hand, who would read novels?

As a result of either the recent rural debt summit, a cranky press release from Bob Katter, a well-orchestrated Facebook campaign backed by a radio personality or a calculated business management decision (you be the judge), ANZ announced it would freeze foreclosures on drought-affected farmers and also supply a few other forms of relief. What a noble deed... or was it? I’d like to know if the costs incurred by this new strategy from the ANZ bank will be written off under ‘bad debt expense’ or ‘marketing’ in their financial statements - my guess is the latter.

“Deferring foreclosures until next Christmas will do very little to help the sector”

As for Dr Pascoe, with the help of his mate Alan Jones he has gained a large following on social media, composed largely it seems of digital rubbernecks and melodramatic magpies obsessed by shiny things like anti-commercialism. Anyone can start a stampede, but what really counts is what you do with that energy, and to date I’ve not seen any contribution made by those enjoying the publicity wagon that addresses the real threat.

That's the issue of around $66 billion debt tied to the ankles of rural Australia. A tough conversation is needed, not more emotive hype.

It’s no surprise we’re in drought, that’s an inevitable part of farming in Australia. Nigel Austin, South Australian award-winning rural journalist, said in his 1986 book Kings Of The Cattle Country: “They were men hardened by deprivation in the driest and least inviting continent on earth; men second to none in survival skills, superb stockman and tending more towards fatalism than bravado”. These men ran cattle in the north over 130 years ago and struggled in the very areas we see struggle today. This is why those businessmen, like James Tyson and Sidney Kidman, bought properties elsewhere to drought-proof their business.

Banks foreclosing on farm businesses or any business is also not a surprise. They are businesses, not charities, and owe much to their shareholders who have an interest in their returns. Simple stuff. Blaming banks for rural debt is like blaming McDonalds for obesity. They don’t force you to eat their food.

“Unsurprisingly the banks will want to clear that bad debt and minimise their risk”

Laura Eadie, a research director for the Centre for Policy Development, stated in a Submission to the 2014 Financial System Inquiry: “Agricultural lending has outpaced production twofold since 2001. This means farm land prices have inflated beyond what farm economics justify – with the risk of widespread default in times of drought. There is an estimated $5 billion of bad debt held by major commercial banks”.

Unsurprisingly the banks will want to clear that bad debt and minimise their risk. Much of the media and flagbearers like Dr Pascoe would have you believe that these farmers are going about their daily business when the bank rocks up, demands their keys and gives them a week to pack. Foreclosures usually take up to two years, following a process of considered mediation and exploration of options between the business owners and the bank. It’s a last resort, the last decision, the last transaction, but many would have you believe its the only one. If you read an annual report from one of the big four, they detail their focus around “strategy to maintain well-diversified credit portfolios focused on achieving an acceptable risk-return balance.” It’s stated there for you, clear as day.

“Unfortunately many farm businesses set and forget ... There’s not enough fat in the system for that”

I asked James Walker from Agrihive for his thoughts on debt. James is also manning a property that’s been 23 months without rain in Longreach, Qld.

“Unfortunately many farm businesses set and forget. Unlike their bank, they set up a financial product and rarely review or revisit," he said.

"The interest starts to compound and the market may drift away from the initial rate which jeopardises the buoyancy of their enterprise. There’s not enough fat in the system for that.”

And that’s before we consider our dismal terms of trade and rainfall variability. Throw in a ban on live export and we have the beginnings of a really big problem, made worse by the fact too many farm businesses have been borrowing against the hope of future growth of the assets and extending their risk beyond their potential to repay.

James went on to say that the key to solving the rural debt problem is to empower producers with the best possible knowledge on their individual situation so they can draw a line in the sand on what’s best for their business.

“If you’re not equipping the borrowers with the right tools to make decisions, then even macro decisions that attack issues like policy or bank function leave these farm businesses open to being consumed by the market,” he said.

Ultimately the farm business manager has to make the decision on what’s best for them, their dependants, the property and business. James argues rallying for macro changes is critical but must be underpinned by enabling micro performance. “The farmer will defend the business interests at the lending end and not the repayment end if we can enable change in this space," he said.

Deferring foreclosures until next Christmas will do very little to help the sector, as there need to be some big changes around weather, markets, business management and property values to make change enough to keep bank shareholders happy. And if all those stars align, it will take the better part of a decade.

What are your thoughts?

FarmOnline
Sam Trethewey

Sam Trethewey

grew up farming down south and now commentates on agriculture across Australia
Date: Newest first | Oldest first

READER COMMENTS

Qlander
17/12/2014 2:04:19 PM

Since farmers have never achieved any thing, and are burden to society. Bushie might do us all a favour and go without them... a fortnight should be enough.
John NIven
17/12/2014 2:19:04 PM

So BB, an agsoc is some sort of mythical creature something like the devil being looked after by God.
pete t
17/12/2014 2:32:07 PM

wtf, did you ever stop to think of the fallout if the aussie banks did stumble during the GFC. Total failure across all sectors. What is the net effect if even 50% of farming operations in QLD are bankrupt... The answer - Not a hell of a lot. There will be some tears, there will be some lost genetics and there will be some lost knowledge - land prices will drop but commodities will go up so profitability will return. We can bank bash all we want but in the end we took the loans on, we got away letting our operational costs (what other business does this) eat into our equity. Its all on us...
seethelight
17/12/2014 5:48:12 PM

Bravo Sam. Someone has to confront the nonsense that someone other than the willing borrower is responsible for the servicing of his debt. Unlike the asset price which can fluctuate,the debt is rock solid and if it can't be serviced it represents a loss which has to be taken by someone. Who better than the person who incurred the debt? Many farmers have been in perilous financial circumstances. Very few have got out of the hole by believing that someone else should take their losses. They begin by facing the cold, hard and distressing facts and taking the actions necessary to salvage what they can.
Bruce Watson
18/12/2014 5:50:34 AM

Bushie you are forgetting that money and its exchange is not subject to weather, or the exchange of values - labour value, etc. It is interesting that a high A$ allows people to purchase overseas - our manufacturing and farming values plummet. The ResBank wants a low A$, what's left of Aus Industry gets a break. But the banks keep shifting the money all over, and the metro-miserables whinge they cannot afford Amazon or os travel. How can a living be made by anybody except the banks - and the pollies, of course, they're all padded by the value of other peoples' labour.
wtf
18/12/2014 6:35:57 AM

So PT, it's acceptable for banks to lend and gamble with impunity with private shareholders as the winners and the public the guarantor? As I have been suggesting in earlier posts, banks should not be able to manufacture bubbles by creating credit, nor erode savings by setting interest rates, nor gamble with derivatives. These are all activities that are too risky and subject society to high risk as u identify. Before, banks lent deposited money, was life impossible then? I think David Murray was trying to suggest things aren't right, we fix it now or wait for a disaster.
Cam
18/12/2014 6:45:05 AM

So BB, according to your definition of a "soc", you have described nearly every industry in Australia, car makers, home builders, manufacturing industry to name but a couple.
Bushie Bill
18/12/2014 7:44:10 AM

Qman, I thought you were more intelligent than you actually are, if you really believe that crap. Of course it helps the poor misbegotten farmers, by paying off their debts. What would happen to them, the farmers, if they could not use the funding to pay off debt? In any event, it is up to the recipients to decide where the funding goes. They can go on world trips if they like. Would you argue that government assistance simply feeds the town merchants who finally get paid for supplying groceries and household goods? Intellectually lazy, Qman. Don't sink to the levels of the brain dead here.
Qlander
18/12/2014 9:27:27 AM

The recipient is the banks, Bushie, the money goes straight to them, only bank interest is paid. Anyone without debt gets nothing, no debt is paid off. The money goes straight from treasury, to the banks' bottom line. What would happen if it wasn't paid? The banks would be stuck with A LOT of non-performing loans. The property market would drop, and anyone still in a secure financial state wouldn't need to borrow as much to buy. So total lending would decline, and with it bank profits. Don't kid yourself, banks have done very well indeed out of 'drought support'.
Ben
18/12/2014 11:01:14 AM

Farmers pay too much for their land in the first place.
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Get MuddyTo think clearly in farming and about farming, you need to get muddy - commit, roll up your sleeves and get involved. SAM TRETHEWEY gets stuck into some of the issues facing those on the land.

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