Farmers bank on debt recommendations

By Jeanette Severs

According to Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) figures, in the 2016–17 financial year the average dairy farm owed $937 000 to banking institutions.

Debt has been a key source of capital for Australian farm business, with 96 per cent of $69.5 billion of national rural debt provided by banks, according to a recent report from Deloitte.

Borrowing funded additional land purchases and new on-farm investment, particularly purchasing machinery and vehicles.

In the dairy industry, debt consolidation and borrowing to cover operating expenses was 19 per cent and 26 per cent respectively

For Donna Edge and Danny O’Shannassy, of Wyena Holsteins, Carpendeit in south-West Victoria, their level of debt, particularly consolidating loans to cover operating expenses, has seen them make the decision to exit the dairy industry.

While rural financial counsellors have deemed them a viable business, Ms Edge said the banking industry had been less than supportive.

One of the recommendations of the Banking Royal Commission was that banks needed to ensure farm debts were managed by experienced agricultural bankers, that farm debt mediation is offered and recognise that external factors, including climate, weather and commodity prices had real impacts on farm viability at any given time.

Wyena Holsteins has reduced milking numbers from 150 to 120 cows, in a bid to reduce input costs against a poor milk price return.

“Our average production was 9500 litres/cow. We’ve dropped back 1000–1500 litres/cow in the past couple of years because it doesn’t justify buying the extra quality feed on the milk price we’re paid,” Ms Edge said.

They were supplying milk to UDP, until it folded — which meant the farm was not paid for the spring milk two years ago.

Needing a cash flow, the couple went to the bank; after six months, the bank came back with an offer to combine the interest only and principal-and-interest loans into one and extend the debt amount, advancing them an additional lump sum — all packaged as a principal and interest loan. They also have an overdraft facility.

“I’ve paid nearly all that extra loan in the past two years and it’s put me under extreme personal pressure, as well as financial pressure,” Ms Edge said. Recently, she applied for a reassessment with the local bank and was unsuccessful.

“The rural financial counsellor assessed our business as viable and supported my loan application to the bank,” Ms Edge said.

“Because of bad lending practices in the past, the banks have now changed their practices. They have offered us three months relief on payments, but they haven’t offered farm debt mediation.

“And the person we’re dealing with in the bank is not an agribusiness professional, so doesn’t understand the issues around milk price, dry weather and other issues.

“Dairy farms pour money into rural communities.”

Ms Edge’s fear is that if or until the couple sell the farm and herd, it has to continue operating as a dairy farm under extreme financial pressure. To diversify income, they have used a beef bull in the milking herd for the first time. Ms Edge has been looking for work since May 2018, to bring an off-farm income into the business.

Dairy Connect president Graham Forbes said he hoped banks would take on the recommendations from the Banking Royal Commission, of factoring in seasonal conditions and fair treatment in providing financial services. He said there was an onus on dairy farmers to also understand financial services.

“It’s important that business bankers have a good understanding of how farms operate; and that farmers understand how banks operate. There also needs to be a cultural change within banks — stop the focus on driving profits. These large institutions need to be focused on their clients,” Mr Forbes said.

A northern Victorian dairy farmer agreed. With a loan of $1.2 million and equity of 65 per cent, this dairy farmer changed banks recently.

“We wanted to deal with a bank where the people cared,” she said.

“The actions of the Big Four banks impact on all the other banks. Banks are very big and each farmer is very small.

“Our current bank appears to want a relationship with us; when we have had health issues, they keep in touch with how we’re managing. They’re not phoning up to ask us how we are going to pay the debt.”

According to Deloitte, ABARES foresees ongoing difficulty for dairy farms to service debt where relatively low dairy prices impacts income and subdues farm investment.

Agricultural advocate Jan Davis said volatility of income streams in the dairy industry, with lag time between contracts, caused bankers to look with disfavour on dairy farms.