Farmers told to seek alternatives to the bank loan, overdraft
The average real debt carried per broadacre farm has increased from $200,000 in 1990 to $500,000 in 2015.
· The Australian
· 12:00AM November 2, 2016
Reporter - Rural/Regional Affairs
The agriculture sector needs more options and different models for raising capital than reliance on the traditional bank loan, overdraft or farm mortgage debt, if it is to meet growing food production demands.
A report from the Australian Farm Institute has found farmers and agricultural businesses overseas have access to more alternatives, mainly because farming in Australia continues to be viewed as volatile, high risk and unattractive to investors.
Yet the rise in total rural debt from $10 billion to $60bn over the past 25 years — with a subsequent increase in farm foreclosures and sales when events such as long droughts occur — has primarily been funded by traditional major lenders such as the big four banks, specialist primary industry bank Rabobank, government assistance loans and other sources of debt.
But new models such as crowd-funding, partnerships with overseas retailers or importers keen to lock in guaranteed food supply contracts, and greater separation of ownership of the land asset from the food production business are all ways to reduce this reliance on debt and banks, says the AFI research.
AFI chief executive Mick Keogh says that while some of these models are already emerging as corporate farming becomes more common in Australia and farm sizes increase with consolidation, a new approach is needed to help with the large scale turn-off in farm ownership as many ageing farmers retire or make succession plans.
Encouraging alternative sources of equity and capital injection may also require some government assistance or policy direction, the AFI report says.
“Obtaining access to appropriately structured finance has been a long-term challenge for the agriculture sector in Australia (because) farmers operate in a business environment that, at an industry level, involves more than twice the level of annual revenue volatility of the average non-farm business,” Mr Keogh said.
“As a consequence, farm financial arrangements have traditionally needed to be structured on a much longer term and more flexible basis than is the case for many other businesses.”
AFI research manager Richard Heath said the capital intensive nature of farming required high levels of investment and farm owners to take on high levels of debt. The average real debt carried per broadacre farm has increased from $200,000 in 1990 to $500,000 in 2015, although the accompanying boost to production and revenue has kept the cost of servicing that debt to around 7c per dollar of income.
Mr Heath said alternatives used in countries such as Brazil included separating the ownership of farm assets from the operation of the business, using leasehold and rental models.
Offtake agreements, in which retailers or importers provide loans in return for guaranteed supply of produce, were popular.
Another traditional model enjoying a comeback is equity-sharing arrangements where farmers or employers jointly own equipment or assets, or enter into share farming in return for an income split.
Crowd funding is also an increasingly popular model.