Reluctant Bankers want at least eight per cent for operating loans, and are asking for risk-mitigation insurance
Two weeks ago some 350 farmers, politicians and bankers attended a meeting at Kulin in the heart of Western Australia (WA) wheat country. It was organized by the local representatives of the West Australian Farmers Federation and called “Agriculture in Crisis — looking for a brighter future.”
There were no surprises and no answers, just disillusion and frustration. Many WA wheat growers have been slowly sliding into financial trouble for years.
Now their troubles are coming to a head. They have suffered from several years of poor seasons caused by drought, frost and summer rain, sometimes all in the same year.
Consequently debts have skyrocketed and equity has fallen to a level which is making the banks nervous.
Australia grows about five per cent of the world’s wheat, and provides between 12 per cent and 15 per cent of the wheat annually traded on the global market. WA grows 80 per cent of Australian exports.
One rural politician has forecast that 30 per cent of WA’s wheat land may not get planted this season due to lack of financing.
The average farm debt in WA is around A$850,000 (C$807,000.) Five-year average yields are about 1.2 tonnes per hectare (18 bu./ac.), but vary greatly from year to year.
The Reserve Bank of Australia interest rate is three per cent, but the trading banks public position is that farm finance this year is “around” eight per cent. I have not found anyone paying less; some have been offered funds at 9.0-9.5 per cent.
For many farmers, they, their bank, or both have had enough of the huge risks associated with the cost of growing wheat in the 21st century in Western Australia.
The head of agribusiness for Westpac, one the four major banks in Australia, confirmed this when he told the farmers his bank was losing its appetite for funding risk. He wants to see some form of risk-mitigation insurance before they can confidently lend to agriculture in the future.
“It’s a game changer for us because it limits… puts a floor in what customers can lose, which means we can talk to their balance sheet over four, five, 10 years, rather than year by year, which is the environment we find ourselves in today,” he said.
He went on to say that spending a million dollars to make $50,000 or five per cent was risky enough, but when there was the chance the farmers could lose the lot, then that was a frightening concept.
Risk-mitigation insurance is something new to Australian farmers. Historically, most have insured against hail and fire. As costs have increased so have the number of farmers prepared to take the risk and not insure. Now the banks are saying, “No risk-mitigation insurance — no finance.”
The earliest such a scheme can be in place is for the 2014 season and that begs the question of what happens in 2013. Canola seeding will start in late April.
The head of Westpac Agribusiness said they have taken the position to look at the farm budgets this year and ask, “If they have a bad year this year, will it bankrupt them?” If the answer is no, then how can we get the million dollars down to say $700,000?” The tough talking, he said, starts if the answer is yes.
According to a farm consultant, the variable costs to grow a hectare of wheat in WA are between A$300 and A$320 or about A$121 (C$127) per acre, or $1.2 million for 10,000 acres.
There has been a significant decline in the number of farmers in Australia: In 1996-97 there were 246,000 farmers, in 2010 there were 192,600. Fewer farmers are borrowing more.
According to the Reserve Bank of Australia, our rural debt has grown from A$1.3 billion in 1965 to $43.4 billion in 2005 and $66.2 billion in 2012.
In Western Australia the number of farmers has declined by 40 per cent over the past 30 years — on average, 300 people have left the industry every month.
A quarter of farmers in WA are aged 65 or over.
It doesn’t look like there are any quick answers except, maybe, from the Chinese.
The Chinese have bought many millions of tonnes of iron from WA and now they are buying WA wheat farms. So far they have bought over 100,000 hectares; some say it’s twice that amount, or more.
With the world paranoid about food security, it looks like the Chinese have their eyes set on Western Australia and there is no law to stop them buying as much land as they want.
There are many elderly WA farmers who would welcome a buyer knocking on their door, chequebook in hand. It wouldn’t matter where they came from.