Banks exposed if farm income drops

By KEVIN TAYLOR

A huge rise in borrowing by the agricultural sector could become a problem for banks as farm incomes fall, says a banking expert.

Massey University's banking studies centre says rural lending rose from $11.28 billion in January 1999 to $15.99 billion by May this year. In the last 12 months lending rose by $3.25 billion.

The figures appear to contradict the assertions of farming leaders that the good times are used to pay off debt.

Banks say land purchases and dairy conversions in the South Island have been important drivers of the lending increase.

Centre senior lecturer David Tripe said lending had risen at a time when the combination of the stronger dollar and falling prices would lead to lower farm incomes.

Tripe said he understood two-thirds or more of total bank lending to the sector was in dairying - when Fonterra's forecast milk solids payout for 2002-03 would be down to $3.70 a kilogram compared with $5.30 last year.

The dairy giant came clean last week on the magnitude of the coming doldrums, at the same time as the Ministry of Agriculture and Forestry reported sliding incomes in all agricultural sectors.

Its annual farm monitoring report predicted average farm revenue would drop 18 per cent this financial year.

Tripe said $4 was the payout figure the banks had assumed in approving loans to dairy farmers, and the BNZ and National Bank confirmed that was the figure they had used.

Tripe said it was reasonable to ask whether banks might run into problems with the lending, how severe the problems might become, and when they would be felt.

He said the impact might not be felt until well into next year and might be delayed further because of the agricultural sector's strong performance of the past few years.

Tripe said all the banks claimed their rural lending portfolios were conservative - but all wondered if the same was true of their competitors.

"Only time will tell."

Agriculture NZ consultant in the Waikato John Hall was surprised by the amount loaned, which he said had probably been driven by an unprecedented increase in land values.

"There are probably a number of people who have paid off a bit of debt but it would seem they would be in the minority." Lending had been used to buy more farmland and update Machinery, or possibly even buy a "house in town or at the beach".

People had been buoyed by the high dairy returns and some had expanded their farms. A top-end Waikato dairy farm was now selling for between $29,600 and $34,500 a hectare compared with $25,000 a hectare only a few months ago.

Tripe's analysis showed the National Bank had the biggest exposure to the rural sector - with $5.5 billion lent as at December 2001, a 15.1 per cent exposure relative to its total assets.

National Bank head of rural banking Charlie Graham said rural debt had stayed "pretty much the same" over the last 20 years, allowing for inflation.