As we move into July the reporting season for agricultural businesses kicks into gear. This year the results will be mixed, with some farmers doing very well, while others will have struggled with increased on farm costs, a tough (dry) summer, a reduced dividend for Fonterra suppliers and for some, too much debt is also causing concern.
At the present time some farmers are struggling with a cashflow shortfall, and while this is common in winter, some are finding it difficult to get overdraft limits increased. We are spending a lot of time with our farming clients, as they work through getting their finances in order with the help of their bank and other farm advisors.
Tougher lending requirements are creating more hoops to go through for our farmers. This is mainly due to Reserve Banking requirements with the Bank revealing proposals late last year which could see the New Zealand banking sector requiring an additional $20 billion in reserves, in an attempt to position itself to withstand a one-in-two-hundred-year crisis. Rural bank managers are looking for good equity positions before approving additional finance, borrowers also need to ensure that budgets stack up with the ability to pay both interest and principal on any loans given out. In addition, borrowers need to be good communicators and show good results, business acumen and a history of reinvestment back into their business.
There is much being written and talked about regarding the effect of environmental considerations on the New Zealand agricultural sector. It is clear that both worldwide consumer demands and Government regulations are having a major effect on the agricultural landscape, and many of these requirements are still being worked through. These considerations have had a negative effect on rural property values which is causing concern for both lenders and farm owners.
Farmers also face labour and staffing challenges, increased compliance and administrative rules, along with increased costs facing their businesses.
Having said all that, on the plus side commodity prices remain strong, with sheep, beef and dairy prices all firm with the exception of wool. Global food demand has never been higher, and this is set to continue with the world population estimated to hit 10 billion by the year 2055. New Zealand has a population of approaching 5 million, but we produce enough food to feed 50 million. So as long as we can continue to farm in a sustainable way, our farmers still have plenty of reason to be optimistic about the future.
In the short-term winter for some is not much fun, but spring is only just around the corner and with newborn calves and lambs to look after and plenty of work to do both on and off the farm, our regions farmers will have plenty of opportunities to keep themselves busy, and their finances improving.