Ag spending surges despite dry season

18 May, 2018 09:47 AM
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Westpac's agribusiness banking general manager Steve Hannan said there was a good level of confidence across the industry despite the difficult and varied seasons.
Westpac's agribusiness banking general manager Steve Hannan said there was a good level of confidence across the industry despite the difficult and varied seasons.

A YEAR of patchy and disappointing seasonal conditions in many parts of Australia is having surprisingly little affect on farmers’ spending habits, as banks report surging investment in equipment, infrastructure and property.

Farm management deposits (FMD) and other savings accounts continue to attract funds too, although dry conditions are set to see more farmers tapping their FMD reserves if good rain does not fall soon.

Westpac has just recorded its biggest quarter for farm sector equipment finance lending since the global financial crisis in 2009.

“Equipment finance activity in the six months to March was up at least 30 per cent on the same period last year,” said agribusiness general manager Steve Hannan.

Grain growing and harvesting machinery was a notable part of that equipment spend, as was improved grain and fodder storage infrastructure on cropping and grazing holdings.

“The trend is fairly much Australia-wide,” Mr Hannan said.

“I think it comes down to a generally good level of confidence across the industry, despite the difficult and varied cropping season in different regions last year and current dry conditions in much of eastern Australia.”

He said farmers were using improved cash flow from meat, wool and horticulture markets to upgrade gear while they could, bolstering their farm’s resilience in preparation for potentially tougher times ahead.

Apart from spending on better infrastructure and plant, farmers stashed away a record $6 billion in FMDs at the end of last financial year.

About $5.1b was still in FMDs at the end of March.

Beef and horticulture producers made substantial increases in their savings in 2016-17, with beef-only producers holding about $800m in FMDs last June – up from about $680m a year earlier.

National Australia Bank agribusiness general manager Khan Horne tipped farm earnings trends were still strong enough to drive FMDs to another end of financial year high this June – probably above $7b.

“Reserves are being drawn on in some drier areas, particularly Queensland, but nationally there’s quite a lot going into savings accounts (not just FMDs), as well as strong spending on new capital initiatives,” Mr Horne said.

He estimated NAB agribusiness customers held a sizeable $12b in various cash reserves.

Mr Horne also noted more farmers opting to make less conventional capital equipment purchases, such as stock yards and solar panels, using asset finance (lease to buy) arrangements over four or five years.

“Equipment finance isn’t just about tractors, headers or utes – farmers even opt for multi-item leases which might include a quad bike and yards in one package.”

Westpac’s Mr Hannan said despite generally poor cropping and declining grazing conditions since January, there had been sufficient resilience to drive surprisingly robust grain sector capital investment strategies and even underpin considerable dry sowing activity in parts of eastern Australia.

“We know farmers overall are fairly resilient operators, but as seen in Queensland and parts of New South Wales in the past few years, the ag industry is getting very good at hanging in there and making the most of things despite continuing weather challenges,” he said.

The grain sector’s strong spending has slightly surprised Rural Bank managing director, Alexandra Gartmann, but she too, noted investment confidence was “solid” across the whole farm scene.

“Demand for finance in the WA grain belt is not as active, but overall it’s about the same as last year,” Ms Gartmann said.

“We’ve also seen more farmers increasing repayments on borrowings.”

She felt recent grain sector spending was partly explained by the big 2016-17 season, which prompted investment considerations which may have only come to fruition in the past six months or so.

“Interest rates are also very low, which is an incentive producers want to take advantage of while they still can.”

Ms Gartmann said big earnings gains for wool growers in the past two years had prompted them to spend on new gear, sheds and other infrastructure.

Property transaction activity was also strong across all sectors, with more demand than available land for sale.

Also helping farmer confidence is the Australian dollar’s downward moves in the past month.

“Anywhere in the lower end of the US70 cent range is a good number,” Mr Hannan said.

While the lingering big dry made many in agribusiness uneasy about the sector’s ability to properly cash in on bullish food commodity demand, Westpac expected a helpful dip in the Australian exchange rate to as low as US72c by year’s end.

“Our chief economist, Bill Evans, is talking about a range between US76c and US72c – that’s a kind number for exporters such as farmers to work with.”

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