Ask a farmer

Today (16/4/20) some encouraging words from the RBNZ Governor, Adrian Orr - He urged banks to be "courageous" and consider the long-term interests of clients.

While that comment wasn't specific to rural banking it’s something myself and many in the industry have been banging on about for a while. Taking a long-term view - farming is in many cases intergenerational.

It’s not long ago (<6 months) the RBNZ and the banks were certainly not talking about being "courageous" with their rural portfolios, nor in my view were they taking a long-term approach. Many rural lenders were in the market saying they were not taking on new rural customers or expanding their rural lending portfolios. “Our shareholders want better returns” I’d be interested in talking to some of those bank shareholders and executives in another couple of months and getting their views of rural lending then.

Now I know the economy will change as a result of Covid-19, what that looks like no one knows, we can try and anticipate with modelling scenarios. Its refreshing to have the RBNZ governor urging the banks to take a courageous longer-term view, albeit a major flip flop for rural lending which I hope is heeded.

I have defended rural lending on behalf of many clients and together (with my clients) we plan for the short and long term. Short term always has been ‘cashflow is king’ while longer term its more around business plans, strategy, goal setting and achievement.

Pre-Covid (and I don’t know if it’s changed now) banking leaders made comments like "we can make more money lending to commercial or residential customers as against rural lending" and that really irked me for a couple of reasons:

1. Commercial lending is cashflow based lending and with that carries high risk as we are witnessing now (sadly). Farming businesses go through sometimes months with minimal or no income but manage (budget for this), yet some commercial businesses are closing up, in receivership or statutory management within 3 weeks of no income. Rural lending also comes with income generating livestock, land and buildings for security, commercial lending often has limited security and is less about ‘bricks and mortar’.
2. Residential lending, is secured by a house but how is the loan serviced? Through the owners (or tenants) being employed. Now starring down the barrel of record unemployment, and businesses failing, where does that leave the home owners that banks lent 80% to? The RBNZ (and banks?) have weighted residential lending as lower risk than rural. I’m pretty sure the basis for this was that it was always considered that a house is easier to sell than a farm.

So, as we go through this pandemic and get out the other side, before the new capital allocations come into banking, a review of risk weightings and models being used between industry type and residential is called for. What are the facts to prove rural lending is higher risk than commercial or residential?

Farmers have always taken a long-term view of their businesses and will continue to do so, in fact that’s what gets most of us out of bed in the mornings and keeps us battling through the toughest of challenges. The amount of pressure on farmers is huge, the ability of farmers physically and mentally is truly amazing, not only do they use soil, water and sunlight to make food, they manage intergenerational businesses through short term crises (like droughts, floods, MBovis, Covid-19 etc) so that the business is around for achieving the longer term goals and strategies.

Managing multi-million dollar businesses, feeding animals and growing crops through the drought that has been running before and concurrently with Covid-19 for most of New Zealand farmers is just one example of how talented farmers are and how tough we are, getting up morning after morning to deal with not one but two major events currently.

So, if you are looking for business advice around being courageous and taking a long-term view, Ask a Farmer.

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