10 Aug 2015

Farmers urged to talk to banks

10:45 am on 10 August 2015

Heavily indebted farmers are being advised to talk to their banks as soon as possible if they believe they will have problems servicing their debt.

Last week, Fonterra cut its milk price forecast by $1.40 to $3.85 per kilogramme of milk solids.

Dairy farmer in a milking shed

Photo: AFP

Westpac said compared to an average milk price of around $5.80, the cut implies $3.3 billion less revenue for Fonterra's suppliers.

ASB expects average annual GDP growth to slow to 2.2 percent from 3 percent in the coming year due to weaker rural consumer spending and reduced dairy investment.

Average operating costs for New Zealand dairy farmers is around $4.50 per kilogram of milk solids.

Back in May, Reserve Bank govenor Graeme Wheeler said at a forecast milk price payout of $4.50 per kilo of milk solids, more than 35 percent of farmers would be making a loss.

Minister for Primary Industries Nathan Guy said that cashflows would be tight for many diary farmers over the next 18 months but the banks have indicated they will stand by them.

National MP, Nathan Guy.

National MP, Nathan Guy. Photo: RNZ / Alexander Robertson

"The equity in terms of their business will be reasonably sound because I don't see land values dropping too much, they may soften a little bit, so this is more of a cashflow issue for the next 12 to 18 months.

"By and large I think the indication that I'm getting from the bankers is that they will stand by farmers."

The Bankers' Association said its members has been working with clients in the rural sector, particularly dairy, for some time in relation to the reduced payout.

Bankers Association chief executive Kirk Hope said agricultural lending made up between 20 and 25 percent of all bank lending in this country, and of the rural lending about three quarters is made up by dairy.

He said banks had been working with clients in the rural sector, particularly dairy, for quite some time in relation to the reduced payout.

"The types of things that banks have been working with their clients on has been developing stronger business plans so that capital expenditure can go into the most efficient and effective parts of production, also if necessary they can suspend interest payments for a certain period of time."

Mr Hope said the association had been working with the Ministry for Primary Industries, Federated Farmers and the Rural Support Trust to get the message out to farmers that the sooner they start talking to their banks the better in terms of planning for the reasonably low dairy payout.

He said everything the association is hearing from within the sector is that banks want to work with farmers.

"No bank ever wants to take a farm to a mortgagee sale, or in fact any property to a morgagee sale, because it takes a long time and it is expensive and it's a terrible experience for the client and the bank."

He said that the provision levels banks have been putting aside for loan losses has not changed markedly which is a good sign that banks do want to work with farmers.

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