No - Your view may not be the bank’s view

AgResearch wrote an interesting paper in 2010 from which I have gleaned a few points.

New Zealand has been through a dairy boom with payouts of around $8.

Now that Fonterra's predicted payout is less than $5 I thought it may be opportune to look at some of the issues, particularly around debt.

Average term liabilities per kg milk solids are around $21. Banks competed for more market share and took on more risk, resulting in some very stretched farmers.

Some budgets are stretched as are security margins and debt per kg. We even have one bank offering a RAM (Reverse Annuity Mortgage) where they lend now, accrue the interest cost to the debt and recover their money when you sell.

On-farm costs have increased for many on the back of the high payout and are difficult to cut back.

So, what are the issues?

Stress rises as your perception of the bank's involvement becomes muddied.
  • What is the bank really saying?
  • Have they changed their behaviour or your credit availability position?
  • Have they increased interest rates or pegged the overdraft? Do they require it all to be repaid?
  • Do you know the bank's plan for your business?
Your relationship with your "friendly" banker changes as your business performance weakens. Finally, you might get put with a specialist debt management unit (out of the ward into the critical care unit).

Stress increases when:

  • There is reduced liquidity and available cash.
  • Tight budgets mean corner cutting, working harder and making do.
  • Equity gets reduced.
  • Thoughts start to pervade of losing the family home and livelihood in severe cases.

Some of the common denominators:

  • Overstating production and income.
  • Climatic impact (droughts, tough winters).
  • Price collapse (as we have faced this season).
  • Cost over-runs in development or any expenditure for that matter.
  • People issues, not to mention matrimonial; accidents, deaths.
  • Animal health break outs such as TB or Theileria.
  • Lack of control of expenditure.
  • Off-farm costs spiralling out of control.
  • Head in the sand mentality, and not being prepared to face up to the issues.
  • The fatal flaws of procrastination and indecision.
  • Fanciful ideas that don't pay.
  • Taking on too much non-Bank debt in the way of HP's.
  • Over optimistic outlook.
  • Farming for Capital Gain.

The bank's role:

  • Firstly their budget is not your budget. They have a completely different basis to yours.
  • They have first security on everything and have a different outlook. You, or the person who put up some cash as an investment, are "second tier" - behind the bank.
  • You need to look at it from your point of view and assess your risk.
  • The bank wants to lend you money to make a return on their investment, i.e. the money they have lent you!
  • The Bank is in business with you.In a way you are farming dairy cows and the banks are farming you! It is possible that highly indebted farmers spend the first six months of the year working for the bank, another five months for the suppliers and one month for themselves.
  • Banks manage their risk with you. They have specially trained people to interface with the borrowers and protect THEIR investment in you.
  • If the account gets "grumpy" they tighten margins, restrict credit and as I said before, put you with a specialist banker whose role is to protect their investment and get their money back. It is just that simple.

In summary

Despite any impression to the contrary, banks are there to make money. They have completely different criteria to you. Their budget should not be your budget. You need to run an efficient business and stay in good control. If the pressure comes on your stress levels will rise. Seek the right help and take action. Head in the sand mentality does not work.

And finally, we need rural bankers to lend us money to grow our equity which is behind that of the banks. There are many brilliant Rural Bankers out there who have helped us all make millions. The AgResearch report is a blunt reminder of your need to be aware and look at things from your point of view: to realise your bank has a completely different agenda.


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