Banks worry on dairy debt amidst a revival of farm sales

While high debt has been a common theme with the dairy expansion, it is a concern that KPMG state that "a number are only keeping up with interest and principal payments, as a result of being highly leveraged" even in these times of record prices.

And with the Reserve Bank's tougher capital overlay rules in rural lending to be imposed in June, interest rates wiil rise putting these farms under more pressure.

So the question remains how will existing or new farms fund the dairy expansion, or will overseas interests finance this development?

The Southland development has an element of equity partnership with the German investors, and maybe more of these sort of deals are they way of the future rather than burdening the venture with too much debt.

High debt levels in the NZ dairy industry remain one of the greatest concerns for the banking sector, despite historically high prices for agricultural exports and a dramatic slowdown in lending to the rural sector in 2010, says KPMG in Stuff. While some farmers are enjoying a profit bounceback, "a number are only keeping up with interest and principal payments, as a result of being highly leveraged from growth through the boom of 2006 to 2008," the accounting firm says in its latest Financial Institutions Performance Survey

The Reserve Bank's proposal to impose a new "capital overlay" requirement on banks lending to farms would "ultimately increase lending costs for farmers and act as a brake on growth in the rural economy, one of the central planks to economic growth in an otherwise uncertain economic landscape," the report says.

KPMG says some of the "big five" banks drew back from rural lending over 2010, reflecting these concerns reports The NZ Herald. Specialist agricultural lender Rabobank stepping into the breach, although its lending growth was low by recent standards, and total rural sector debt was stable at around $47 billion, after double digit growth for most of the last decade.In the meantime, banks are "managing their distressed rural assets rather than forcing a sale because of lessons learned during previous recessions, when individual banks lost market share, and the on-the-ground reality of a depressed rural property market.

If NZ's richest man, Graeme Hart, can sell a big chunk of his record-sized dairy farms on offer in south Waikato, new life must be stirring in the moribund rural real estate market, industry watchers say in Business Day. Mr Hart, through his Rank Group-owned Carter Holt Harvey forestry company, has sold eight farms near Tokoroa out of 29 on offer. The farms have languished on the market since 2009 in the post-global financial crisis recession.

That leaves 21 dairy farms still to find new owners in what was marketed as the biggest single offering of farming land in New Zealand. The asking price for the 29 farms last year was $224.5m.It is understood that a syndicate of New Zealand and overseas business people interested last year in buying farms and building a milk processing plant at or near Tokoroa is still in talks with Rank.

The country's biggest rural real estate company, PGG Wrightson, said "It's not taking off but there has been more activity, more good, genuine inquiry and more sales – but it is off a low base," general manager Stuart Cooper said. The type of sales had also changed this year, with a slight rise in sales of economically viable $2 million-plus farms.

A German investor group has won approval to extend its purchases of Southland dairy farms, adding two more properties worth a total of $14 million. Aquila AgrarINVEST, D/S Neuseeland Milchfarm Investitions and Alceda Star have gained clearance from the Overseas Investment Office to take controlling stakes in two limited partnerships that have about 408 hectares of farmland under management.
The German institutions in January were approved to buy 1,302 hectares of property for $37.8m - part of $109.7m in land sales put together by Feilding-based farm syndication and management group AgInvest reports Stuff.

The German group will own 95 per cent of Ota Dairies Limited Partnership and 80 per cent of Scotts Gap Limited Partnership. They won approval from the OIO with the promise of creating new jobs lifting farm production and building new homes and milking sheds on the farms.The Scotts Gap property is to be converted to dairy from sheep. One of the investors already owns a neighbouring property and the land is to be developed into a larger dairy operation.