The (almost) $70 billion investment in Australian agribusiness
In this edition of the Agribusiness Bulletin, we take a look at rural debt in key sectors and overall debt trends.
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The (almost) $70 billion investment in Australian agribusiness
Debt funding has long been a key source of capital for Australian farm businesses. As early as 1965, rural debt (as reported by the Reserve Bank of Australia) in Australia was $1.2 billion of which half was provided by banks. The remaining half was split between pastoral houses (the likes of which have included lenders such as Primac, Dalgety and AWB Finance) and government.
According to the latest data from the Reserve Bank of Australia (RBA), rural debt is now nearly six times more than it was 52 years ago and banks provide a larger proportion of rural debt (96% of the $69.5 billion) than has been the case any time since 1965. And that makes banks the biggest, long-term investors in Australian agribusiness.
The rise of the banks in the provision of rural debt has been well documented, and particularly the period leading up to the global financial crisis when total rural debt doubled between 2002 and 2007. However, rural debt is not spread evenly across sectors or geographies, and not all farms carry large bank debts. In this edition of the Agribusiness Bulletin, we take a look at debt in key sectors and overall debt trends.
Sector insights from FY16
Whilst the RBA data is aggregated, we look to data from ABARES Farm Survey reports for sectorial insight on debt levels and debt servicing. Sectors referred to in those reports are “dairy” and “broadacre” (encompassing wheat and other crops, mixed livestock-crops, sheep, beef, and sheep-beef enterprises). Highlights from the latest Farm Survey report released in April 2017 include:
- At 30 June 2016 more than two thirds of aggregate broadacre debt was held by 12% of farms with these farms producing approximately half of the value of broadacre farm production in FY16
- For the dairy industry, more than two thirds of total debt was held by one third of farms
- Servicing debt in the broadacre sector - as measured by ratio of interest payments to net farm income - was “easier” in FY16 than anytime in at least the last 20 years due to the combined effect of relatively low interest rates, record value of farm production and record net income
- But it’s a different story for the dairy industry. Though also benefitting from relatively low interest rates, net income (per farm) was below the peaks of the three prior periods (FY13 to FY15) as lower farm-gate milk prices took effect. In Victoria, for example, more than one third of net farm income in FY16 is anticipated by ABARES to be directed to meet interest payments
- On a geographical basis, around one third of Western Australian broadacre farms and one third of Northern Territory beef cattle properties carry more than $1 million in debt, whilst beef and beef-sheep farms nationally have less than $100,000 of debt on average.
Rural debt – where to from here?
In FY16, broadacre debt rose by 7% to $560,500 per farm, whilst dairy debt rose (also by 7%) to $937,600 per farm. The ABARES forecast for rural debt in FY17 is also differentiated by sector:
- With ABARES forecasting another record year in broadacre farms net incomes in FY17, debt servicing pressure would be expected to remain relatively subdued (all other factors being equal)
- Indeed, with two consecutive years of strong net income and an assumption of continued low interest rate environment, broadacre farmers may take the opportunity for capex investment (to increase productivity), expansion by acquisition (for increased scale or geographic diversification) or debt reduction (to enhance future profitability)
- Broadacre debt per farm is forecast to remain relatively unchanged, as the effect of favourable trading conditions (key factors being favourable winter crops, and good prices for beef, lamb and grains) reduces the need for significant levels of new debt and the recent trend towards debt reduction continues in effect. So a relatively unchanged level of debt per farm could possibly be attributed to factors such as the relative financial return from different crops (for example, chickpeas versus wheat), or equity contribution (from prior years’ profits) towards the purchase of additional farmland.
- ABARES foresees another difficult year in terms of debt serviceability for the dairy sector where relatively low dairy prices (as forecast by ABARES and announced by milk processors) could cause lower or constrained milk production and overall relatively lower net incomes than have occurred in recent years. As a result, farm investment and acquisition activity is likely to be relatively subdued, and total indebtedness to remain relatively unchanged from FY16 levels
- Somewhat surprisingly then, dairy debt per farm is also forecast by ABARES to reduce slightly in FY17. Despite challenging trading conditions (with farm-gate milk prices remaining below the peak levels of recent years), this reported average debt reduction per farm could be as a result of smaller or less profitable dairy businesses switching from milk to beef or lamb, or becoming mixed farm businesses which results in their reclassification under ABARES reporting. The trend in the number of dairy businesses will be key to understanding the aggregate and average debt results in FY17.
The aggregated RBA data reflects these sector trends; total rural debt is increasing year on year though at a slower rate than the peak growth period of 2000 to 2007 when rural debt doubled from $26 billion to $53 billion. Since 2007, annual aggregate rural debt growth has averaged 5.4% but slowed more recently to 2-3% as the combined effects of more favourable trading conditions for Australian agribusinesses and lower interest bills have reduced demand for debt.
Pockets of growth – in terms of rural debt – will have emerged in FY17 but it may be that aggregate rural debt is yet to breach the $70 billion mark. We’ll know the answer in November this year when the RBA releases the rural debt figures for FY17.