18 Nov 2013

Rural lender warns of fast debt build-up

11:57 am on 18 November 2013

One of the country's biggest rural lenders says the ingredients are there for another rapid build-up of debt in the sector.

The Reserve Bank said last week that one of the risks to the country's financial system is the high level of debt in the dairy sector, although the central bank is not too worried yet.

According to the Reserve Bank, agricultural debt sat at about $50.5 billion in June. That was up 5.5% from a year ago, with dairy farming accounting for much more than half.

Rabobank has about 16.5% of the rural market, which it believes makes it the third largest rural lender.

New Zealand chief executive Ben Russell says if rural lending growth stays in the single low digits, his bank will be very comfortable but there could be a more rapid expansion in debt.

He says commodity prices are looking good for the current season, which has generated more confidence in the sector.

Banks are generally becoming quite willing to lend to the dairy sector, he says, which could lead to a build-up of debt.

The Reserve Bank says given the record milk payout, there is an opportunity for farmers to reduce their debt, but there is also a risk farmers could make borrowing decisions based on the assumption of consistently high future commodity prices.

Mr Russell says Rabobank has done research that indicates those prices are likely to ease during 2014 and 2015 because of a potential build-up of supply.

He says banks need to make their lending decisions, and farmers their business planning decisions, based on more conservative, longer terms values on milk prices, as well as interest rates.

Banks seen as competing for deals

Fraser Farm Finance's Don Fraser, who provides farmers with financial advice, says banks seem really bullish and are again competing for deals, although he believes they are being more cautious.

The Reserve Bank says there are tentative signs that activity in the rural property sector has picked up and that the value of farm sales has risen 5% since the start of the year.

It says history suggests the increase in sales activity is likely to lead to greater credit growth.

Mr Fraser says farmers are focussed on growing their assets, but also have their eyes on tax-free capital gains from buying land.

"If capital gain's coming back in and values are going up, then farmers will take aboard more risk and more debt to start making gain again," he says.

He says the potential tax-free gain distorts farmers' thinking.

Reserve Bank Govenor Graeme Wheeler says roughly half the dairy debt is owned by a tenth of the farmers.

Deputy governor Grant Spencer says while dairy debt is not a concern yet, the bank does have the tools to lean on the sector, using macro-prudential policy.

The Reserve Bank is currently undertaking a review of rural lending.