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What can we learn from trends in farm lending?

With the spotlight shining bright on rural lending practices, the NFF’s economist has unpacked the available data to understand the trends.

Access to credit to purchase land and agricultural businesses, manage cash flow and expand operations is paramount to the farm sector, given the infrequent nature of payments for crops and livestock as well as other primary products. Also, food and fibre producers face significantly more volatility in incomes than other industries.

That might explain the policy interest in this space, with a Senate Committee currently examining primary production lending and the Productivity Commission undertaking a review into competition in the Australian financial sector.

There’s a lack of detailed information available publicly but there are some broad industry trends worth highlighting:

  • access to debt finance, particularly working capital, has become harder to come by since the Global Financial Crisis (Chart 1);
  • the cost of that finance has gone up (Chart 2)

CHART 1: Annual growth in rural lending

Source: RBA statistical table D09

Chart 1 above shows that since the GFC, rural lending has only grown at an average rate of around 1.8 per cent per year. This is in stark contrast to the 9.5 per cent average over the forty-odd years prior to the GFC. It seems to be revolving credit that is harder to come by. What’s more, farmers are more dependent than ever on loans from banks.

...it shows the need for greater transparency in the agribusiness banking sector to ensure there is adequate competition in the regions
Scott Kompo-Harms, General Manager, Economics & Trade, NFF

Agriculture is not alone – it is an issue faced by most small businesses. However, agriculture seems to have been more harshly affected. As chart 2 below shows, the cost of that credit seems to have gone up more than other small business loans.

CHART 2: Gap between standard variable mortgage rate and business loans


There’s only so much that can be gained from looking at available rural lending data, and we don’t want to overcook it, but it shows the need for greater transparency in the agribusiness banking sector to ensure there is adequate competition in the regions.

There are some markets where some banks are big players. During the GFC, two bank mergers were approved. Commonwealth Bank of Australia took over BankWest and Westpac swallowed up St George. BankWest was a key player in agribusiness lending in WA, and St George, through its ownership of the Bank SA brand was a big player in SA. At the time, the competition regulator, the ACCC, acknowledged that agribusiness lending was different to other types of lending because face-to-face service was more important than internet and phone banking. There simply is no substitute for having a presence in a regional market. Also, the ACCC knew that these players were big in their home states.

It would be interesting to see what the ACCC thinks of the agribusiness lending market in hindsight, in the wake of these mergers.

To be fair, there are some alternatives, but these aren’t perfect, and it’s questionable how much competitive discipline they provide to bank lenders:

  • there’s limited working capital provided by grain handlers, for example, that will pre-pay for harvests or essentially ‘store-credit’ through regional farm suppliers (Landmark, Elders). They have their place, but all up these types of finance are likely to be relatively expensive and other lenders know this;
  • Farm Management Deposits are a great tool for farmers to manage their own working capital, but these only help farmers who have made profits already – they don’t provide much help to new entrants to the sector.

There are some great recommendations in the Small Business Ombudsman report on small business loans, and the better news is that banks are starting to take this on board. Credit where it’s due. But at the NFF, we want to see an increased focus on agricultural lending issues, and we need better data to make more informed policy.

Scott Kompo-Harms is the General Manager - Trade and Economics, National Farmers' Federation

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