Farmers with $250m in loans anxious about company's future

Dairy conversions have exposed some borrowers but many are cutting expenditure. Photo / Christine Cornege

South Canterbury Finance's collapse with hundreds of rural sector loans worth more than $250 million raises questions about the risk to the nation's agricultural engine room.

The company said in its April prospectus that it had a long-standing presence in the rural lending market as a result of Allan Hubbard's background and extensive relationships in the sector.

The company's net rural loan portfolio at the end of last year was about $252 million and covered a number of loan types from term loans for land use changes to seasonal funding arrangements "and all forms of rural activities from sheep and beef to dairy farming".

The company had about 236 rural loans with an average net value of about $1.07 million.

Federated Farmers president Don Nicolson said at this stage of the season farmers had a number of large outgoings with little or no income.

"Seasonal finance facilities are critical to farm businesses because it will be a number of weeks before farm revenues resume," Nicolson said.

"The recent speculation about [South Canterbury Finance's] future has caused much unease but the Government's innovative approach does seem to significantly reduce risk of an implosion."

Silver Fern Farms chairman Eoin Garden said many farming businesses and rural enterprises had benefited from Allan Hubbard's willingness to support the sector.

"It's very important that the [receivership] process allows all that funding into the rural infrastructure to continue and to be managed appropriately," Garden said.

The only risk was where individual businesses were not financially viable or strong, he said.

"The appropriate level of risk will be accepted by other financiers and so businesses that are getting on with life and are able to trade financially, there should not be a great deal of risk."

Stuart Locke, chairman of the finance department at Waikato University, said there was adequate liquidity in the banking sector to pick up anything in the rural finance area.

"The people have their money guaranteed so that's going to actually remove some distress and perhaps promote a little bit of liquidity," Locke said.

"I think it removes a large degree of uncertainty from the agri-business finance sector around South Canterbury by saying, 'Right, it's over and done with, we move on and there is capacity elsewhere in the marketplace to well and truly cover this at this time'."

Many farmers had been highly geared but people had cut back on expenses and expenditure during the past 18 months.

"I thought the aggregate position was suggesting that farm indebtedness was coming down."

The most heavily indebted were those who had undertaken largescale dairy conversions, Locke said.

"As long as the Fonterra price holds up these people should not be as threatened as they were 12, 18 months ago when we were looking at a $5.10 payout.

"The stars are well aligned for these people who have high debt at the moment to work that out."

Commodity prices were up, interest rates were down and cash flow to a lot of the farming sector should be net positive, he said.

"They should be able to continue to service their loans to South Canterbury in an orderly fashion" and the banking sector had plenty of capacity.

* Farmers can call 0800-327-646 to discuss their situation with Federated Farmers or call 03-6120-6367 after hours to talk to the South Canterbury Rural Support Trust.


FARM EXPOSURE

SCF rural lending at December 31, 2009

* $252m approx net loan portfolio
* 236 loans with average net value of about $1.07 million
* Seven exposures each in excess of $10 million
* $68.5m largest exposure to South Island Farm Holdings
* $201.7m gross secured by first ranking charges
* $21m total impairment provisions