Think it's all good down on the farm? Think again. Property values are plunging, and the crisis could yet hit the cities too, reports Karyn Scherer.
On the afternoon of January 17, John Taylor (not his real name) decided to take some time out from the daily grind of managing his family's farm in the central North Island.
Persuaded it would be worth his while, he filled his car with gas and tootled off to a meeting of fellow farmers fed up with their banks.
While the evening proved a catharsis of sorts, it may have done more harm than good. When another farmer offered her blunt assessment of John's situation - there was no doubt, she suggested, that he was about to lose his farm - he visibly recoiled, as if slapped in the face.
Later, with cheery farewells completed, he headed back to his car. As he sank into the driver's seat, his thoughts turned as dark as the inky night, and he began to sob.
It's not the image most townies have of your average Kiwi cockie. If you asked a city-dweller, most would probably guess that things were pretty good down on the farm right now.
Sure, the value of the New Zealand dollar remains stubbornly high, but meat and wool prices finally appear to be improving, and dairy farmers are widely perceived to be creaming it.
Since its creation, Fonterra's payout to dairy farmers has risen from $5.35 per kg of milksolids in 2001 to $7.90 in 2008. This year, it is expected to be around $7.35.
While that should translate to a healthy income for most dairy farmers, in inflation-adjusted terms the payout has mostly fallen since the 1970s, with only a very recent rise. And in the meantime, like their city cousins, many farmers have committed themselves to huge amounts of debt.
Between 1990 and 2000, the price of rural land doubled. It doubled again between 2000 and 2005. And again between 2005 and 2008.
Prices were largely fuelled by a flood of cash from the banks. According to data collated by the Reserve Bank, over the past seven years alone the amount banks have dished out to the agricultural sector has more than doubled from $19 billion to $47 billion.
Two-thirds has gone to dairy farmers, or to people wanting to convert land to dairying.
The dam burst in early 2008, and since then land prices have plummeted. In some parts of the country, values have halved and many farmers now owe more to their banks than their farms are worth - a situation known as negative equity.
Some, such as Taylor, are under enormous pressure from their banks to sell anything they can, even though they have yet to default on a payment.
"What has happened to [John] is just disgusting," says a friend. "It's a wonder that some of these farmers haven't turned their guns on their bankers, or themselves."
In fact, anecdotal reports of farmers committing suicide are beginning to emerge. Whether or not these are exaggerated, townies can't afford to be complacent.
While urban land prices have not yet fallen to anything like the same extent as rural land, there is a rough correlation between the two. And more importantly, the rural economy is what underpins the New Zealand economy.
In the aftermath of almost all crises, some people are inevitably tempted to shout: "I told you so". Before the global financial crisis, many Kiwis were too busy feeling smug about the rocketing value of their houses to take much notice of warnings from the Reserve Bank, and others, that things getting out of hand.
But former banker and registered valuer Bruce Wills can quite correctly point to a paper he wrote in 2006, while taking part in the Kellogg Rural Leadership Programme at Massey University, which has indeed proved prescient.
The paper, titled The NZ Rural Property Market: Where To From Here?, concluded that the market was experiencing "irrational exuberance", and that the prices being paid for rural land could not be justified by farm incomes. It predicted prices would fall by 20 to 30 per cent.
"I did a number of presentations of that around the country and in several of them the room was full of bankers, and basically I got bollocked from pillar to post," he recalls. "They just wiped their hands and told me I was completely out of touch."
Wills, who quit a 20-year career with AMP in 2003 to become a farmer himself, is these days a spokesman for the fibre division of Federated Farmers. He despairs that each generation is so willing to ignore the lessons of the past.
He believes the pain now being felt by many farmers is simply a repeat of what happened in the 80s, and he is convinced it will happen again in 20 to 30 years' time.
When he was with AMP, Wills refused to lend to farmers whose figures didn't add up. But even before the lending boom peaked, he noticed they usually managed to get the money anyway by approaching another bank.
A common refrain from rural bankers at the time was that debt was like a good working dog - you shouldn't keep it tied up. Many farmers claim their banks bullied them into taking on more debt.
"I think with the benefit of hindsight, everybody got just a little carried away. We forgot the fundamentals, and we all just got caught up in the cycle. It was the same in housing and in commercial building."
Part of the problem, he believes, is that bankers have a direct financial incentive to approve as many loans as possible because that's what their bonuses are based on.
"When I first went to Wellington and was working for a blue-chip, conservative company like AMP, I used to rub shoulders with a few DFC analysts. They were the only people in the mid-80s who were being paid bonuses based on their performance. I was horrified, and I remember discussions within AMP saying how crazy can you be to pay guys that will encourage investments?"
DFC, of course, later collapsed, owing more than $2 billion. The statutory manager appointed to sort out the mess was Sandy Maier, better known these days for his similar role at South Canterbury Finance.
Wills insists the South Canterbury Finance receivership was no surprise to rural bankers. In his banking days, "if someone came to us with a really stretched proposal, we used to send them down to South Canterbury Finance. They were the lender of last resort for many years."
But in the same breath he accuses banks of being driven by "fear and greed", Wills insists that farmers must share some of the blame for their predicament.
"My phone rings quite regularly with people in the back country that ring up and say their bankers are out to ruin them. But in my experience, there are always two sides to the story. And I can normally ask these guys a couple of questions and find out that they have borrowed an absolutely irresponsible amount of money."
It's also convenient for farmers to blame Fonterra for spooking the banks with an overly pessimistic forecast of the likely payout in 2009, he believes.
"In this day and age we do live in a volatile world. I don't think anyone in the wool industry would have predicted that prices would go up 50 per cent in one year. But we've got to learn to live with this sort of fluctuation, and to be able to cope with the bad years you're inevitably going to get. And that will continue to trip up these quite highly geared farmers until they get their accounts in order."
While Pongaroa farmer Janette Walker admits farmers have to take some responsibility for their finances, she also notes that, unlike banks, farmers can't just raise their prices when the going gets tough.
"As farmers, we have to deal with a lot of things that are out of our control, like the exchange rate and commodity prices. The banks get paid for their risk in terms of the interest rates they charge and they build that risk into their rates. Now that things have turned to custard, they should step up and absorb some of that risk because they've actually already been paid for it."
But Massey University banking lecturer David Tripe insists banks are feeling the pinch. Giant receiverships like the Crafar farms, and the Manawatu farms owned by Bob McVitty, have forced banks to write down the value of hundreds of millions of dollars worth of loans, he says.
Which is probably why, Tripe agrees, some of the Australian banks are believed to have gone cool on New Zealand and are instead eyeing far more lucrative markets in Asia.
"In my view, certainly, when you look at the way they were lending, it started to raise serious questions about the quality of the banks' risk management processes."
In fact, the main trading banks have been serious players in the rural sector for only 20 years or so, since National Bank bought the Rural Bank - known as the farmers' bank - in 1992. What is now known as ANZ National remains by far the biggest rural lender, with around 40 per cent of the market, although it is widely perceived to have recently lost its enthusiasm for the sector. BNZ is in second place, Rabobank third, and ASB and Westpac fourth and fifth respectively.
Tripe says he has also been pointing out for a decade the problem of bankers' bonuses being based on their lending. "No one has been very interested in publishing anything on it, because it's not consistent with the story the banks are telling which is that everything is wonderful, and it's all under control."
In recent official statements, the Reserve Bank has been cautiously pessimistic about the rural sector.
Since the global financial crisis, the central bank's main concern has been the amount banks have lent to people to buy houses, which accounts for the vast majority of their loans. But rural lending now accounts for around one-sixth of the banks' total lending.
South Canterbury Finance's problems have meant an important second-tier lender has effectively gone. While its lending is believed to have accounted for less than 1 per cent of total rural lending, information released by the Reserve Bank under the Official Information Act shows just how worried it was about SCF as far back as 2009.
An internal bank report in September 2009 noted Allan Hubbard was a significant Fonterra shareholder, and that his company, Dairy Holdings, contributed more than 1 per cent of the country's dairy production.
"There is an argument that a forced sale of Dairy Holdings farms or Allan Hubbard's shareholding could have systemic implications due to a collapse in farm prices and resulting collapse in collateral values held on mortgages by other financiers."
The report also questioned whether such a sale "[could] be the pebble that starts an avalanche". It concluded that the avalanche might occur anyway "as a result of systemic problems within the sector that needed rectifying".
Since 2008, as part of an international banking accord known as Basel II, the Reserve Bank has required banks to put aside more money for a rainy day than previously. Known as capital adequacy ratios, it means banks will have to keep higher reserves than in the past. The new rules also require banks to be more realistic about the risks involved in different types of loans.
Privately, central bank staff admit they were incredulous that, at the height of the boom, banks were willing to lend up to 110 per cent of the value of houses. They were also concerned about the banks' love affair with dairying, and their failure to realise that high commodity prices and land prices might not last.
In practice, the new rules have forced banks to rely more heavily on local investors to give them cash, and on long-term lending from overseas. It has also meant they have returned to their previous policies of requiring significant deposits from anyone wanting a loan.
While the trading banks have been known to blame the Reserve Bank for their new stinginess, the central bank has in fact quietly delayed introducing specific measures for rural lending that were due to come into effect last July.
Federated Farmers believes it convinced the Reserve Bank that placing further pressure on the sector could be disastrous.
The banks themselves have warned that the new rules, which will now come into effect in July this year, could lead to farmers paying more for their loans.
Most farmers already pay at least 0.5 percentage points above business base rates, and some pay as much as 4.75 percentage points more, meaning some are already paying double-digit rates.
The Reserve Bank has yet to formally approve the new rules, but most banks have already tightened their own criteria, and are generally demanding at least 50 per cent equity from farmers wanting to buy new farms. Further tweaks to the Basel II rules, known as Basel III, are also being discussed.
Meanwhile, Federated Farmers and others have suggested changes to the Code of Banking Practice, which is also being reviewed.
One change Federated Farmers would like to see is removal of the $200,000 cap on compensation for successful complaints to the Banking Ombudsman. Given that most farmers deal in seven-figure sums, they are effectively precluded from even using the system, it argues.
The lobby group has also urged the Government to follow Canada and New South Wales by introducing a law requiring banks to enter into mediation with struggling farmers.
When New Zealand First proposed a similar law in 1999, it was fiercely opposed by the banks. At the time, Federated Farmers also opposed it. Its economics spokesman, Philip York, says the organisation has reversed its stance as it believes the issue of rural debt is now much more serious.
York says banks have told him only 10 per cent of rural customers are having problems. However, he believes the situation is precarious and could easily become a crisis if commodity prices suddenly slumped.
A fillip in farm sales in December has cheered many rural estate agents, even though the number of sales remains low in historic terms.
The Real Estate Institute's rural spokesman, Peter McDonald, is one of many agents who believe the market has probably bottomed out. Many are also encouraged, says McDonald, that most banks have started to increase their lending after two years of a virtual freeze.
A strong dairy payout, and much improved prices for meat and wool, have convinced many farmers there was no need for banks to start calling in their loans.
But some veterans, such as Wills, are not convinced the worst is over. As Wills pointed out way back in 2006, a "correction" may be painful, but it is also necessary so that young people can continue to enter the industry and to see a future in farming.
"Debt in rural New Zealand is still the elephant in the room, and it's still a significant problem that we haven't yet addressed," he says.
"Sure, the banks have slowed down their lending and attitudes have changed and we're all a little bit wiser now, but what worries me is we haven't really started deleveraging our sector. And that has got to happen and when that happens, it's going to really hurt."
That, however, is news to John Taylor. For him, it's already hurting pretty bad.
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