Comment: Farmers working through Government policy challenges need the confidence that their banks will continue to support them, writes Federated Farmers manager for general policy, Nick Clark.
Over recent months there has been a quiet, but occasionally noisy, war between the Reserve Bank and those it regulates - the banks - over bank capital requirements.
The cause of this war is arcane and mysterious but the stakes are high.
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• Banks promise not to shutdown regional branches as Government trials 'banking hubs'
In this case the Reserve Bank wants to increase the amount of capital that banks are required to hold while the banks are resisting and threatening to pass on the multi-billion dollar costs to their customers rather than their shareholders.
As with many wars over the course of human history, one side or the other tries to drag in third parties and in this case they're farmers.
Knowing the political clout that the farming sector still commands, banks have been putting the wind up farmers and blaming the Reserve Bank for tighter lending conditions and higher costs of lending.
Earlier this year when Federated Farmers expressed concern about the possible impacts on our members some commentators claimed that Feds were either in cahoots with the banks or had been frightened into joining their side.
To be clear, Federated Farmers is not taking sides.
Instead, we're talking to both the banks and the Reserve Bank and we're engaging constructively with them as the Reserve Bank moves closer to decision time.
As part of this engagement we arranged a number of meetings in August and September for Reserve Bank officials to meet with Federated Farmers' provincial presidents and executive committees.
These meetings were well attended despite being held at a very busy time in the farming calendar, and in the midst of Essential Freshwater consultation meetings.
Read more from Federated Farmers here.
There's no doubt the Reserve Bank's proposals are causing concern for many farmers, especially as it is widely acknowledged that the additional costs will fall disproportionately on them.
Although most would agree that the Reserve Bank's proposals make sense from a big picture, we're concerned about the magnitude of the changes, the pace of change, and what they mean for farmers.
The big banks are very profitable, among the most profitable in the world. In theory they should be able to absorb the costs by reducing dividends to their shareholders.
However, shareholders are used to their high returns and don't want to accept substantial reductions.
So with the Reserve Bank unable to force the banks to suck it up they will recover the costs where they can – most likely from rural and small business customers.
Those sectors have relatively less competition among banks for their business and less alternatives to bank finance. Rural customers are also (unlike banks) price takers and have no ability to pass on higher costs.
For farmers the Reserve Bank's proposals come at a time when banks are reducing their appetite for the rural sector and wish to reduce or at least not grow their exposure to it.
This is a turnaround from most of the period since 2000 when bank lending to agriculture exploded from $12 billion to nearly $64 billion today.
With reduced opportunities for farmers to convert to dairy or intensify production to grow their incomes and with capital gain opportunities now greatly reduced banks are less comfortable with high debt farming.
Federated Farmers' banking surveys have shown a deterioration in farmer satisfaction with banks, and indicating more farmers are coming under pressure.
They are seeing higher interest rate margins, reductions in overdraft limits, requirements to pay principle or to sell assets, knocking back of requests to borrow more, and tighter requirements for budgets and plans.
Farmers have also heard of banks thinking about exiting from rural lending.
Despite the noise, in my opinion shutting up shop is unlikely due to the profitability of the rural sector to banks and an awareness by the banks that precipitative action would give them image problems and trigger perverse impacts, such as mass forced sales that would crash the rural land market and in turn impact adversely on equity of all farmers and implications for bank capital.
Instead we will more likely see a long hard grind and a ratcheting of pressure.
The most prominent theme of the meetings was grave concern about the costs of other government policies that will impact on farmers, in particular the Essential Freshwater proposals and climate change policy (Zero Carbon Bill and ETS) and with other environmental issues such as RMA reform, winter grazing, and indigenous biodiversity still to come.
These policies will impose considerable financial costs on farmers (both for capital investment and for input costs) and they will also impact on production and therefore farm incomes, so severely squeezing profitability and potentially tipping many farmers (but especially highly indebted farmers with little headroom) into losses.
Banks are very aware of these policies and they are impacting on their risk appetite and are a factor in tighter lending conditions.
Farmers are worried about where they are expected to find the money to comply with the new policies if banks aren't prepared to lend more to them.
Despite good commodity prices, a lower exchange rate, and low interest rates farmer morale is as low as it has been since the 1980s when subsidies were removed, exchange rates and interest rates skyrocketed, and the country was hit by a series of severe floods and droughts.
Final decisions on bank capital are due in December. Although the Reserve Bank seems committed to proceeding with its proposals, we're hopeful that there will at least be an extension of the transition period from five years to perhaps up to 10 years. And we need the Government to moderate or take a breather on its wider policies affecting farming.
As for the banks, as farmers work through the challenges they're facing they need the confidence that their banks will continue to stand by them and support them.
If all this come to pass we may yet achieve peace (and prosperity) in our time.
- Nick Clark is the Federated Farmers manager for general policy based in Christchurch.