Despite the floods of 2022, Aussie farmers have been reaping the benefits of good commodity prices and seasonal conditions recently, with many experiencing record-breaking production. However, as commodity prices come off their record highs and drying conditions are expected, farmers will increasingly need brokers to ensure they can keep ploughing ahead
The flood damage of 2022 saw large swathes of farmland across the Australian states of NSW, Queensland, and Victoria inundated by flood waters, damaging multiple crops such as wheat and potatoes, and delaying sorghum planting.
While natural disasters tend to be localised, the devastating floods were felt right across Australia with higher supermarket prices for milk, fruit, vegetables, and other farm products.
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But Aussie farmers are well accustomed to boom and bust cycles relating to climate. In fact, according to modelling by the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES), changes in climate between 2001 and 2020 (relative to the two decades prior) reduced annual average farm profits by an estimated 23 per cent or around $29,200 per farm.
The recent weather events are yet another reminder of the importance of planning ahead in the face of a changing climate.
Land acquisitions
Speaking to The Adviser, the co-founder and director of Agribusiness Finance Australia, Michael Tonkin, who services clients across Victoria, said while the recent rainfall delayed a lot of crops and interrupted cattle production, the majority of farms have had a good run of business.
“For the great majority of beef cattle, lamb, wool or cereal farming — by and large — they have had good seasons, probably for the best part of the decade,” Mr Tonkin says.
Given the number of good years has bolstered balance sheets, farmers have been on the hunt for additional land to grow their businesses.
However, following the surge of people moving to regional Australia, during the COVID-19 pandemic, and a corresponding surge in land values, acquiring land is easier said than done.
While there are some resilient markets, farm acreage in Victoria is now selling for at least $10,000 an acre, taking 200-acre farming properties well over $2 million, according to Mr Tonkin.
“You don’t have to extrapolate that out to a very large arm holding to end up having to borrow into the millions if not the tens of millions of dollars,” he tells The Adviser.
“They’re probably the larger transactions that we’ve been acting for over the last couple of years acquiring new land to grow their business.”
Indeed, the Department of Agriculture, Fisheries and Forestry (DAFF) observed the latest agricultural lending statistics provided by the Australian Prudential Regulatory Authority (APRA), shows the value of loans and leases owed by the farm sector was $94 billion at 30 June 2021, an increase of around 6 per cent from the previous June.
Agribusinesses stocking up of farm equipment
In addition, many lenders have been reporting significant increases in finance requests for new agricultural equipment, driven by strong balance sheets and tax incentives, such as the instant asset write-off.
For example, National Australia Bank (NAB) reported a 59 per cent increase for finance for large grain and general haulage trailers in its 2022 financial year. This was followed by headers, which jumped 18 per cent.
Indeed, the Australian agri equipment market sits at around $20 billion, with asset finance for agri equipment around $9.2 billion as at 31 December 2022 (a 12.5 per cent increase), according to the Australian Finance Industry Association (AFIA).
But while farms have been enjoying the fruits of their labour (and good seasons), the effect of global interest rate rises, high inflation, and higher input costs are expected to weaken trade conditions.
“We’re entering into a phase where we don’t have everything in our favour anymore, margins are going to be tighter,” Mr Tonkin says.
Thus, the management of cash flow is now becoming a greater priority, he notes.
For example, the broker suggests that refinances and renegotiation will become “more important and relevant to a customer than acquiring property”.
“A lot of the discussions that we’re having is balance sheet management and [clients] debt position, not necessarily refinancing,” he says.
“It is more beneficial to work on a long-term relationship and retain this with a bank than to start a new relationship with another bank.
“Practically speaking, it is sometimes necessary to acknowledge that a bank’s current terms of finance offered are not going to be met by the client, or that they are not to the client’s best interest at a certain point in time (which may have been unforeseen, originally).
“It’s important that the bank understands the client’s business and, as long as they do so, it is always beneficial to work with that bank to restructure rather than to just think of refinancing.”
However, with interest rates rising and banks keen to grow their book, refinancing has continued to save clients in the hundreds of thousands, he concedes.
Alternative equipment finance
While agribusiness broker Sharyn Gommers at Hamptons Advisory says the agri sector remains undeterred by rising interest rates, the tight labour market and slow migration have pushed some to invest in alternative equipment.
“Farmers are good at doing more with less, so the majority have adapted to [the tight labour conditions],” she tells The Adviser.
In fact, Ms Gommers flags that some clients have actually invested in additional equipment to reduce reliance on workers.
“There’s been extra equipment finance opportunities for my business, [while] others have hired contractors to fill the gap (so the contractors have also required upgraded equipment), which has seen some additional working capital required pending receipt of income/s,” she explains.
The time for brokers to be in agri finance is now
Another setback for the agribusiness sector has been the closure of regional banks over the past few decades, with many towns losing their local business bankers.
Indeed, the Finance Sector Union estimates that more than 60 per cent of regional banks have closed in the past 50 years, with closures escalating in recent years as more consumers go online for their banking needs.
The closures have sparked a Senate inquiry into the economic and social impacts of regional bank closures, which is expected to deliver a final report in December 2023. During its two-day public hearings in May (17th and 18th), the Senate heard the importance of banking services in regional communities, particularly with a large agribusiness sector, where billions of dollars are poured through the banks.
As such, the opportunity for the regional broker in assisting agribusinesses for the long haul is heightened. In fact, Suncorp Bank told the Senate that broker numbers far outweighed the number of its branches — both now and in the future — for both the consumer and the business finance space.
