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Rural lending tightening despite record low interest rates

29-Aug-2019 07:00:00

Interest rates are at an all-time low but access to funding for rural property is becoming more difficult. The Reserve Bank’s proposal to increase capital requirements will reduce the banks’ ability to lend, at least until their reserves are built up, and could increase the cost of capital as the banks move to protect their margins.

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A restriction on lending ability means banks are scrutinising which sectors they lend to, looking for those that offer better returns and less risk. Agriculture is seen as risky, particularly dairy farmers who are already carrying high levels of debt. Many will not be in a position to absorb an increase in their cost of capital.

Over 14% of the total private debt in New Zealand is in agriculture, and over 65% of this is being held by the dairy industry. Farms with high level of debt struggle to make a profit even when dairy prices are good. It is estimated that a third of dairy farms are operating near break even.

While banks have been moving away from dairy lending, loans for horticulture have been on the rise. This reduced tolerance for risk on the part of the banks has also been reflected in a move away from interest-only loans and an increasing expectation of principal and interest repayments.

The Federated Farmers May 2019 banking survey showed that farmers are feeling more pressure from their banks than they have at any time since August 2015. This is largely due to the perceptions of farmers in the dairy industry. 16% of all farmers surveyed said they felt under increased pressure which was up 5% from last November while 20% of dairy farmers said they were under extra pressure.

A shortfall of capital could also impact on the ability of the rural sector to address emerging opportunities and threats. With the effects of global warming already being felt, the need to invest in technology to optimise returns and minimise the use of resources has never been greater.


Sources:
Farmer’s Weekly, ANZ’s rural manager questions capital call, 14 June 2019
Rural credit squeeze putting pressure on farmers, Findex press release, 4 June 2019
Federated Farmers survey, May 2019
Interest.co.nz, Rural News, 6 June 2019

Topics: Rural, Rural market, Lifestyle and rural property