Rural Debt Speech at Australian Property Institute Conference (Rockhampton)

It’s a great pleasure to have been invited to speak at the Australian Property Institute Rural Queensland Property conference.

I note that my speech has been titled “Rural Debt Crisis”. Up front I want to say that I did not choose the title but I have used those words before. Sometimes that has generated a debate whether it really is a crisis.

Like most semantic debates I think this misses the point. We know from the statistics that around 3 per cent of farm businesses are more than 90 days in arrears. Because there are around 130,000 farm businesses in Australia, that represents somewhere around 4,000 families in financial stress.

Is that a big enough number to call the situation a crisis? Well I don’t know but I know that for those 4,000 families it would certainly be a crisis.

Moreover, this figure of financial stress looks worse for the farm sector than other small businesses. For other small businesses, the percentage that is more than 90 days in arrears is around 2 per cent. Until a few years ago, farm businesses had a lower arrears rate than other small businesses. Today, that situation has reversed.

Why has that situation reversed? Primarily I believe the principle issue has been the common repeated cycle of a credit boom inducing an asset bubble followed by a day of reckoning.

Total rural debt has increased fivefold – up from $13 billion in 1993 to $64.3 billion at the end of 2013. A fetish for debt was not a preference unique to the rural industry over the last two decades. It infected all industries across the globe as the forces unleashed by financial deregulation in the previous two decades reached their apogee. It seems pretty clear that lower interest rates, and more relaxed lending standards, unleashed “animal spirits” in the cattle industry.

As figures from Herron Todd White show, asset values soared – in the north Queensland pastoral industry prices went up from about five times. Since the Global Financial Crisis asset values have fallen by roughly 40 per cent. If you go to The Economist’s website you can pull up an interactive graph of house prices in US cities like Phoenix, Las Vegas and Detroit. You could add another line called “north Queensland grazing industry” – it would not look out of place.

Indeed, it would be highest “hill” among them all. In the US house prices “only” went up between two and three times before falling by about a third. The American sub-prime crisis wreaked havoc through the US economy.

Of course, Australia’s rural lending issues are not going to imperil our wider economy because agriculture is too small a part of our income to do so. Further, while there are farmers doing it tough all over Australia, the rural debt issues are concentrated in certain geographic areas of Australia. In North Queensland more than 5 per cent of farm businesses are either in arrears, in mediation or facing foreclosure.

If this is a crisis, it is a crisis concentrated in a few areas. The crisis has emerged through a perfect storm of factors, including drought, inept political management, low beef prices and a high dollar.

• In many parts of Queensland the drought is the worst in 100 years. Some areas have not had decent rains for three wet seasons straight.
• The decision to ban live cattle exports to Indonesia in mid-2011 wreaked havoc throughout Australia and created a bulge in the beef supply chain that meant that lots of cattle were ready to be turned off just as the drought did its worst.
• That led to low farm-gate prices for cattle despite record world prices.
• The high dollar has also made it difficult for the Australian industry to benefit from high global prices – but this is now turning around.

No industry could have survived this confluence of bad luck and not lost a lot of skin. The fact we still have a northern beef industry and one with bright prospects in my view, is a testament to the resilience and productivity of our farmers and the wider industry.

I only came into the Senate in July last year. I had set up my Senate office here in Rockhampton because there was no Senator from Townsville to Brisbane. I had come to the beef capital of Australia and the biggest issue people were talking to me about was rural debt in the beef sector.

I had graziers driving hours to my office to talk about it. Government had to act, at least in part because the diabolical live cattle decision was a decision of government so we bore much of the blame for the situation.

I called for a Senate inquiry as a way forward. Eventually the Agriculture Minister, Barnaby Joyce, agreed to host an Agricultural Farm Finance forum, that I co-chaired with him, in Canberra on 23 September last year. There were four main outcomes from that conference:

1. ABARES was commissioned to work with the banks and industry to establish the extent of problems in the northern Queensland gulf, south-west Queensland and north-west New South Wales. Previously there had been frustration that the banks had not been willing to share information on the extent of the issues so the debate had been dominated by rumour and innuendo.  That report has since been released.
2. The Minister agreed that more needed to be done to ease the terms and conditions of the concessional loan programs available. On 4 December 2014, Barnaby announced $100 million for additional Drought Recovery Concessional Loans. These low interest loans will fund planting and restocking activities to help farm businesses crippled by the effects of drought to resume typical operations when the rain comes. The loans opened in Queensland on 29 January. Interest rates on loans were also reduced to reflect lower Commonwealth borrowing costs.
3. The banks agreed to review lending and debt mediation practices given the size and severity of the drought. The banks reassure us that foreclosures are generally the last resort, given the severity of this drought it is a good thing that the ANZ and the Commonwealth Bank have announced additional support for drought-stressed farm businesses and some relief from foreclosure. The government will continue to encourage banks to be fair, decent and patient with drought-affected farmers.
4. A working group was established to work on a National Farm Debt Mediation scheme, whereby farmers and their financiers can work through a formal dispute resolution process. While New South Wales and Victoria currently have legislated debt mediation schemes in place, and Queensland and some other states have voluntary debt mediation schemes, a national approach is needed to ensure all farmers have access to this process and all financiers adhere to its requirements. Work on this scheme involves working with all of the states and is ongoing.

I think it is worthwhile to pause and reflect on how hard it has been for many to cope through this situation. The ABARES report has highlighted a few stylistic facts that give greater insight into what is happening in rural Australia.

• While much of the focus is on “debt”, what is causing the most pain and heartache for families is a lack of cash – due to low prices when turnoff was high and now low turnoff that prices are higher. More than half of North Queensland farms recorded a negative income last year and 40 per cent of farms in the south west Queensland did the same. For north Queensland, this is the highest proportion recorded since 1997–98, a year in which live cattle exports were reduced by a financial crisis in South-East Asia, and cattle prices were also historically low. For south-west Queensland, This is the highest proportion recorded since 2006–07 during what was the worst year of the Federation drought.
• According to ABARES farm survey data, average farm cash incomes of northern Queensland gulf broadacre farms in 2013–14 were the lowest recorded in the past 25 years. Despite an increase in numbers of cattle turned-off, including an increase in numbers sold for live export, very low cattle prices resulted in a fall in average farm receipts.
• In 2014–15, farm cash income is projected to fall further to an average of -$7000 per farm as a result of lower total farm cash receipts. If realised, this would be the second lowest farm cash income recorded for this region in the past 26 years.
• Debt’s immediate contribution to this cash flow crisis is of course through higher interest repayments. Across the regions examined by ABARES the average farm has to devote in excess of 15 per cent of farm receipts just to meet interest payments.  This is historically high for these regions and compares with average of around 8-9 per cent for broadacre farms nationally in recent years.
• This is a concentrated problem not a widespread threat to the future of the Australian beef industry. Around 70 per cent of total broadacre sector debt in 2012 was being held by 12 per cent of farms, most of which were larger operations. Based on Australian Beef Association lending data, around 24 per cent of borrowers in the north Queensland gulf region had bank loans exceeding $2 million.
• The vast majority of beef producers maintain healthy equity ratios – although I am sceptical of too heavily on balance sheet ratios in the grazing industry were farm sales are few and the reliability of valuations is questionable.
• Notwithstanding the high debt-to-income ratio, lower business lending rates and the slowdown in rural debt growth have led to a decline in the rural sector’s interest payments as a share of income since 2008. However, recent RBA liaison with agricultural businesses indicates that some individual farms may be finding it difficult to access additional funding due to their existing high debt levels.

Compiling this information has been crucial for Barnaby to argue for additional concessional loans and assistance for drought stricken farmers. Including the new recovery loans I mentioned earlier, there is a total now of $580 million in concessional loan funding available for graziers and farmers to respond to drought and recover from it.

Drought concessional loans can be used for debt restructuring, productivity enhancement, operating expenses and drought recovery. Across the concessional loans programs so far, 472 applications have been approved, totalling over $239 million in concessional loans.

Concessional loans are providing funding to viable farmers in a position where their bank has reached its risk appetite. Loans are also providing a significant interest rate saving. Loans for drought response and recovery attract a 3.84 per cent interest rate. Loans under the Farm Finance package – which has a broader application than just drought recovery – attract a 4.34 per cent interest rate.

Concessional loans are helping to drive competition in the banking sector – a number of farmers have used the offer of the loans to negotiate more favourable terms with their bank.

The government has also provided more direct grants to help people get through difficult circumstances. More than 4,000 farmers are receiving Farm Household Allowance payments.

• Just over $23 million has been allocated to invest in water infrastructure
• $8.8 million has been allocated to pest management
• Over $15.5 million has now been made available under the social and community support element and includes funding for five regional drought coordinators based in Tamworth, Armidale, Longreach, Charleville and Mount Isa. And, $1.3 million in new funding for social support service providers was announced just two weeks ago.

I have to admit though that most of this government assistance is not a long-term solution. As mentioned above this is primarily a cashflow problem. While some aspects of this cashflow problem have been exacerbated by drought, live cattle exports and the high dollar, there has been a secular trend for decades of lower profitability for the beef sector.

This has been a combination of higher post farm-gate processing costs, lower global demand for beef and therefore lower prices. In real terms, since the Second World War farm-gate prices for beef have fallen by more than 60 per cent. The price paid by consumers has risen by around 20 per cent. The only way we have stayed in the game is a remarkable increase in grazing productivity. While genetics and pasture management hold out some hope for the future, I would question whether we can repeat a similar increase in productivity over the next 60 years.

Key is to improve profitability of the sector and return a far greater return to the farm gate. For our first 18 months in government, we have had two main targets: providing temporary relief for those in drought and providing long-term relief by opening new markets and boosting competition for cattle buying.

The agreements we have signed with Korea, Japan and China have given substantially more access to beef.

• In Korea, our beef tariffs will be gone after 15 years, and we are no longer disadvantaged relative to the US, whereas before, if we had not signed that agreement, each year we were getting worse and worse relative to the US and we would have lost Korean markets.
• In the Japanese market we have had tariffs fall by 20 per cent in just the last two months weeks. They fell from 38.5 per cent for both chilled and fresh beef to 30.5 per cent for frozen beef and 32.5 per cent for fresh beef. Continuing annual cuts in future years will eventually see the current tariffs cut by up to almost 50%
• We have opened six new live cattle markets and possibly a seventh to China very soon.

Greater market access is already having an impact. Australia’s beef prices are at record highs. On the Eastern Young Cattle Indicator, prices are currently 421 cents a kilo, up from around 313 cents when we came to government September 2013, an increase of 34 per cent. Lamb prices have gone up as well. At the election they were 417 cents a kilo and today they are 496 cents a kilo, an increase of 20 per cent. 

Hopefully, this growth will deliver a brighter future. There is evidence that the global surplus of beef that has prevailed since the 1970s is turning around. That should lead to higher prices and growth in our beef sector, not just maintenance of what we have got.

To achieve that growth we will need more debt. We will need banks willing to lend to graziers because I want to keep our family-focused beef sector not one that is dominated by overseas corporate interests. The only real alternative to bank financing of family farms, is overseas equity financing corporate farms. Young rural Australians want to aspire to own the homestead not a truck and a toolbox so they can work for someone else.

I think to achieve that we will need to reconsider some of our approach to debt issues in the rural sector. We need to ensure that prudential requirements suit the variability of the farm incomes not retro-fitted to the rural sector after having been designed for the needs for the housing sector.

Likewise, I think there is a role for government to provide loans to graziers on a more permanent basis to encourage competition in the rural lending market, and encourage farmers to invest in better risk management practices, including through insurance. Some of these ideas are being discussed through the agriculture white paper process.

Overall, there is a bright future for our beef sector. For some there is a crisis around debt, cashflow and profitability but with better policy decisions there is a fertile global environment to turn that outlook around.