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?

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Sam Trethewey

Sam Trethewey

grew up farming down south and now commentates on agriculture across Australia
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READER COMMENTS

Keith
16/12/2014 2:54:42 AM

Sam. Could not have said it better myself.
BR
16/12/2014 5:13:23 AM

Well said!
Farmer
16/12/2014 5:33:55 AM

Excellent article and sums up the reality, however sad for some farmers, but in the end its a business, its very much about risk management. Likewise in the city there are over leveraged home mortgage holders, small business owners who have leveraged the business using family homes as collateral. Thanks for putting it in perspective.
Qlander
16/12/2014 7:20:10 AM

Yep the deferrals are just marketing, there's no point in trying to sell rural properties in a drought anyway, plus for the people in real trouble 1 year won't make any difference anyway. Over the cause of my life I've come to the conclusion, that the worst decision people make - is not to make any decision. They focus on their daily work routine, and hope the problem will go away. I saw the same thing happen during the wool crash of the early 90's.
Qlander
16/12/2014 7:29:26 AM

What needs to come out of this, is a very close look at banking practices, not just predatory lending. Some of the behaviour as well. I was totally shocked by something that happen with my bank in May/June, luckily I had enough financial strength to confront them ... apologises were offered and it was blamed on 'the computer' However I've wonder what would have happen, if I had have been in a less strong position. Conversations around the area, lead me to believe that my experience was the norm rather then the exception.
GulfHorizons
16/12/2014 9:31:38 AM

Good article Sam. I would add is that we need policy action on reducing the amount of debt. There are too many cattlemen in trouble to let the market forces run their course. The cohort of cattlemen that grow cattle in the harsh country of Nth West Qld and the Gulf Country cannot be depleted if the State and Fed Govts are going to meet their goals of substantially increasing ag production in the Nth by 2030/50. It is just too hard to grow cattle up here so we need to keep the knowledge and experience of many generations on the land. New policy needs to reduce debt not postpone or add to it.
Geronimo
16/12/2014 10:49:45 AM

Poor financial literacy is THE biggest issue in the bush right now - as it has been for some time.
Youth Grazier
16/12/2014 2:14:54 PM

Well im 21 and think this is narrow minded. Maybe you should look into things more then get in to it. Maybe you should research more into things too understand both sides of the fence, and filter peoples bs then comment. :)
Bushie Bill
16/12/2014 4:34:39 PM

Sam, you have a wonderful way with words, and you have an excellent and extremely clear thinking mind. Keep the pressure up until the sulking whingeing brain-dead agsocs are all defeated. When they are gone, and only when they are gone, will Australian agriculture have a chance of reaching it true potential. The best thing agsocs can do for their industry is leave it, and damned soon, for the sake of taxpayers' solvency and sanity. Keep sticking it to them, Sam! More power to your pen!
Megan
16/12/2014 8:10:54 PM

Sam .. the question I hear people asking is 'why is agriculture so unprofitable in Australia ? .. now that is the tough conversation that needs to be had?
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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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