For the past few years, we’ve seen brokers increasingly turn to asset and equipment finance as a means to diversify and meet client needs. But once they’ve mastered that area, where can they go next? Annie Kane looks at a possible growth avenue — agribusiness finance — and learns about the ins and outs of writing finance in this space.
In 2016/17, the agricultural industry grew by a whopping 23 per cent — the largest growth of any of Australia’s 19 industries. It’s a powerhouse of the Australian economy, being the nation’s biggest contributor to gross domestic product, employing 1.6 million people and growing more than $62 billion of produce. It even has its own day of celebration: the National Agriculture and Related Industries Day, observed on 21 November.
Given that it’s such a huge part of the economy and the country (around half of Australia’s land mass is reported to be managed by farmers), the agricultural sector and its businesses can be a valuable part of a broker’s business.
Indeed, with the National Farmers’ Federation expecting to grow farm gate income to $100 billion by 2030, many agribusinesses could be soon looking to expand, and in order to do that, they would need finance.
But as with any new industry, the key to success in working in agribusiness finance is preparation, education and experience. “You don’t have to have had a [farming] background to work in this area, but you do need to have an understanding of it and to be exposed to it,” says Peter Schroeder, executive director of Mildura Finance, a Victoria-based brokerage specialising in agribusiness finance.
“If you really want to get into this area, it’s a matter of speaking to those working in it — so industry groups like farmers federations and so forth. They are pretty happy to take anyone who wants to learn about not only farming but also how the industry survives and profits and so forth. Because most of the state bodies are made up of farmers themselves and they want to get more benefit for the industry, they are normally happy and willing to talk and educate any brokers that want to move into it.”
Mr Schroeder, who is also the director of strategic partnerships for asset finance aggregator Platform Consolidated Group Pty Ltd, adds that once good relationships have been formed with federations and farmers, it’s also easier to build referral sources with their accounting and industry groups.
He says: “A broker needs to understand the area they live in and the type of agricultural industries in their region, and reading industry information will help with gaining that knowledge, too. But it’s really like dealing with most SMEs; the more you get involved, the easier it becomes.” However, writing finance for agricultural businesses is quite different from writing loans for small- to medium-sized businesses. While equipment finance and leasing is an easy crossover from car finance, transactional solutions and crop financing require a little more education.
Mr Schroeder explains: “Agribusiness differs due to the seasonality of the income, [as] most farmers only get paid once or twice a year when they have harvested their crops (but this varies with dairy, which is paid weekly), and while the loan life is much the same as normal SMEs, repayments normally fall in line with income; that is, once a year after harvest. “Further, interest rates for the agricultural sector may have a small loading due to the seasonality of payments.”
While agribusinesses, like any business, will require finance for a range of reasons — one common example is a farmer purchasing a neighbouring property for expansion — this space also has the same facilities as those on offer to SMEs like commercial bills, overdrafts, etc. According to Mildura Finance, a basic facility in this case may be a 10-year principal and interest loan with an interest rate of around 6 per cent and annual repayments. However, the type of industry being financed determines the loan-to-value ratio (LVR).
Mr Schroeder explains: “Dryland farming (e.g., cereals), in particular, is about 60 per cent, while grazing properties (e.g., sheep stations) can be as low as 40 per cent. Table grapes are around about 60 per cent, but it very much depends on the bank’s risk appetite. “Station country, for example, could be in drought for seven years, so there is a high risk in those areas. Table grapes are reliant on irrigation, so you are reliant on the elements and what happens to the weather.”
Another difference is that there is a variation in what can be borrowed against an agri property, depending on the part of the industry the farmer is involved in. “A table grape property is different [from] a dryland or cotton farm,” Mr Schroeder says. “If you don’t understand a particular part of agriculture, don’t presume it will be the same as the part you may know.”
As the loans for agribusiness can range from around $500,000 to multi-million-dollar deals, some loans can be put out for tender, providing the client with more choice and (hopefully) a better deal. Mr Schroeder says that lenders generally take into consideration the lending ratio against the property, the experience of the mortgagor, the types of crops and the details of their sale markets, among other things. Similarly to residential properties, lenders’ appetites for agribusiness will also change, depending on growing conditions and their exposures to specific sectors. “The market changes continually, based on seasonal conditions,” Mr Schroeder elaborates. “So, last year we had a very wet year and large crops, so everyone was out chasing business. But really hot weather at the wrong time of year can cause a lot of damage to fresh fruit, in particular. So, then the lenders will cool down on taking on new clients in table grapes, for instance.”
While agribusiness finance may be more complicated than mortgage broking, Mr Schroeder says that the personal satisfaction he gets from it is the best part of the job. “I like working with my clients and trying to find them the best deal and seeing how that really impacts them. We build clients for life; I have clients that I’ve dealt with for 30 years and now I’m dealing with their sons and daughters. So, it becomes more of a friendship; you form really strong relationships with your clients.”
He adds: “You become really good friends with them and sometimes you get a box of grapes or a leg of lamb, or something like that, too, so that’s an added bonus!”
Annie Kane is the editor of The Adviser magazine, Australia’s leading magazine for mortgage brokers. As well as writing news and features on the Australian mortgage market, financial regulation, fintechs and the wider lending market – Annie is also the host of the Elite Broker podcast and regulator contributor to the Mortgage Business Uncut podcast.
Before joining The Adviser team at Momentum Media in 2016, Annie wrote for a range of business and consumer titles, including The Guardian (Australia), BBC Music Magazine, Elle (Australia), BBC Countryfile, BBC Homes & Antiques, and Resource magazine.
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