Royal Commission leads to tightening on rural lending

Royal Commission leads to tightening on rural lending


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In September last year the government tabled the Financial Services Royal Commission. Since then, there has been plenty of speculation around the flow on effects this will have for the financial services sector.

For many in the agricultural industry who rely heavily on finance, deciphering the politics from the reality is an onerous task.

So, to save you the time, we’re going to take a closer look at the early impacts of the Financial Services Royal Commission drawing on industry sources and what it might mean for the agricultural sector, particularly broadacre farming. 

Why did the Royal Commission happen? The Interim paper pointed to greed...

“Selling became their focus of attention. Too often it became the sole focus of attention. Products and services multiplied," it said. 

"Banks searched for their ‘share of the customer’s wallet’. From the executive suite to the front line, staff were measured and rewarded by reference to profit and sales.” [1]

Obviously, financing is a very important part of the Australian agricultural industry. Most agribusinesses aren’t weekly, fortnightly or monthly income earners, and there is a heavy reliance on lending to fund investment and working cashflow requirements prior to selling their produce.

ABARES agricultural lending data released in October 2018 found 95% of Australian farms are family owned and operated, with $70.123 billion of agricultural debt spread across 145,656 entities. [2]

The role of providing working and term debt finance has traditionally been serviced by commercial banks.

However, as a result of the Royal Commission findings, lenders are reviewing their credit procedures and lending/profit cultures which will directly impact traditional funding arrangements.

We’re seeing tighter lending guidelines and lower loan to equity ratios, especially in rural areas; including regions which have ‘strong prospects and those that haven’t been touched by drought’. [3] 

“Tighter lending criteria the big banks have been putting in place for residential home loan customers have flown through to aspiring buyers of rural properties and acreages”. Elders CEO says. [4]    

So, what does it mean going forward?

Unfortunately, we’re going to have to wait until the whole process is complete to gauge the full impacts on rural lending, but for the time being, financial reviews are taking longer and we are starting to see more hurdles than previously. 

Fortunately, not all is lost. Competitive, flexible alternative lending pathways are more common place today and now frequently form part of agribusinesses core funding mix. [4]

This is especially true of the younger farming demographic who don’t have the loyalty or can’t access ‘traditional banking’ lines of finance. 

Younger producers are turning to residential home loans to buy their first farm because financing for agriculture has become too difficult to obtain in Australia.

Queensland’s First Start Loan offers young farmers access to alternative funding arrangements. Since 2009, 439 First Start Loan applications have been approved valued at $1,686 million. [5]  

So, while farmers are still using traditional lending avenues, they are now looking at alternative lending pathways for property, machinery purchases and cashflow assistance throughout the year. The previously mentioned ABARES report showed working capital debt accounting for 37 per cent of average broadacre debt at 30th June 2017. 

This demand has seen an increase in alternate funding lines move into the agricultural industry to assist in continued investment and growth. Given the current scrutiny surrounding the traditional funding lines, it would be safe to speculate there will be more products coming to market to help feed this growing need for farm finance.

Agfarm is a provider of alternate finance for dryland and irrigated broadacre cropping, including fodder crops. Agfarm Accelerate is an input finance product which gives farmers a line of credit at participating outlets to purchase crop inputs such as agchem, fertiliser, seed, fuel and lubricants, water, crop insurance and more recently, land lease payments.

The credit is repaid post-harvest with commodity sale proceeds before January 15, 2020. [6] The facility is secured over your future crop, not the land your crop is grown on.

For more information on Agfarm Accelerate and how it can assist your cashflow and investment this season visit agfarm.com.au/finance or call your Regional Manager on: NSW and QLD: Anthony Hall – 0400 873 777; VIC: James Ryssenbeek – 0447 743 556; SA: Kate Phillips – 0438 128 472; or WA: Reid Seaby – 0439 625 853.

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Footnotes (References):

[1] https://financialservices.royalcommission.gov.au/Documents/interim-report/interim-report-exec-summary.pdf

[2] Department of Agriculture and Water Resources 2018, Agricultural Lending Data 2016–17, Canberra, October.CC BY 4.0. http://www.agriculture.gov.au/SiteCollectionDocuments/agriculture-food/drought/ag-lending-data-2016-17.pdf

[3] Australian Financial Review, Simon Evans 14 th Dec 2018

[4] Australian Financial Review, Simon Evans 14 th Dec 2018

[5] Australian Dairy Farmer “Young Farmers take on home loans” Matthew Cranson 2014

[6] https://financialservices.royalcommission.gov.au/Documents/interim-report/interim-report-exec-summary.pdf

The story Royal Commission leads to tightening on rural lending first appeared on Stock & Land.

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