Under its mandate to maintain our economy’s financial stability, the Reserve Bank of New Zealand (RBNZ) has repeatedly highlighted agri-business lending. It’s expressed concern over the growth of agri-business debt and the effect of volatile commodity prices on how this borrowing is managed.

The RBNZ’s recent changes to bank capital requirements mean banks will need to hold additional capital against lending. The higher the risk profile of the business, the more capital banks must hold against each loan. Over the next seven years, it is likely to increase the cost of lending, but it’s too early to say by exactly how much.

The more understanding and information you have, the better equipped you’ll be to have positive conversations with your bank. That’s why we asked the banks to explain what the changes will mean for you.

Here’s what the five largest rural lenders had to say.

What will this mean for dairy farmers?

Mark Hiddleston, ANZ Bank, managing director commercial & agri

Mark Hiddleston, ANZ Bank.

Dairy farmers can expect continued support from ANZ. ANZ believes in the long term the whole country will benefit from the RBNZ’s changes through a more stable and robust economy.

In the shorter term, farmers will increasingly need to provide us with good quality information, and be able to demonstrate that their farms are worth investing in.

This means they must be more innovative and efficient, looking for improvements in areas such as pasture management, the use of precision farming techniques, while also seeking advances in genetics, pastures, forages and new technology.

Increasingly land values are likely to reflect the efficiency, proven performance and productive capability of the farm.

Making long term plans around the environment, succession and governance will ensure that farmers are better prepared for the ups and downs of the commodity cycle and are more resilient to factors such as severe weather events and shifting consumer preferences.

All those involved in the sector – banks, farmers and shareholders - can expect to carry some of the cost of these changes in the short term.

But ANZ believes the end result, a stable and robust financial system, is ultimately in everyone’s interests.

• See the answers Mark from ANZ Bank gave to each question

  The environment has changed with respect to access to capital, where has this change come from and why?

  The RBNZ’s mandate to ensure the financial stability of the economy has seen it over the last decade repeatedly highlight agri-business lending — both on-farm and in the wider industry.

  It expressed concern over the growth of this debt and the effect of volatility in commodity prices on how this borrowing is managed, see here.

  Now, the RBNZ has chosen to use capital ratios as a way of ensuring New Zealand has a robust and stable economy.

  This increase in capital is significant for banks, but it’s too early to say exactly how it will affect individual customers.

  Banks are required to hold differing levels of capital against different sectors. The higher the risk — like in the agri sector — the more capital banks must hold against each loan.

  ANZ has been planning for these changes since the original consultation began with the RBNZ and is in a strong capital position.

  Any changes we make will be implemented gradually and we will discuss their impact with each customer, working with them to ensure the best outcome.

  What will this mean for dairy farmers?

  Dairy farmers can expect continued support from ANZ. ANZ believes in the long term the whole country will benefit from the RBNZ’s changes through a more stable and robust economy.

  In the shorter term, farmers will increasingly need to provide us with good quality information, and be able to demonstrate that their farms are worth investing in.

  This means they must be more innovative and efficient, looking for improvements in areas such as pasture management, the use of precision farming techniques, while also seeking advances in genetics, pastures, forages and new technology.

  Increasingly land values are likely to reflect the efficiency, proven performance and productive capability of the farm. 

  Making long term plans around the environment, succession and governance will ensure that farmers are better prepared for the ups and downs of the commodity cycle and are more resilient to factors such as severe weather events and shifting consumer preferences.

  All those involved in the sector — banks, farmers and shareholders — can expect to carry some of the cost of these changes in the short term.

  But ANZ believes the end result, a stable and robust financial system, is ultimately in everyone’s interests.

  Do you have additional requirements around environmental impacts, or other non-financial KPIs that you are trying to implement that farmers should be aware of?

  All farmers will be aware of the increasing number of regulations that govern their activities.

  To be able to assess the financial and environmental sustainability of a farming business, banks need to work with farmers and support their efforts to make sure they are taking steps to comply with these regulations.

  This is nothing new, but simply reflects an increasing expectation that to have a social licence to operate, all businesses — including banks and farms — must do so in a responsible and environmentally sustainable fashion.

  For many years, ANZ has been supporting the sector by helping farmers meet their environmental obligations by lending to them to do this.  

  ANZ offers low-interest ‘Environment Loans’ to New Zealand farmers, to support their investment in water, waste and energy.

  What are the key pieces of information a farmer should provide when putting a funding proposition forward to the bank?

  Every farm is unique in terms of its personal and business goals.

  We will want to see the normal financial data — budgets, actuals, cash flow — and any succession plans that demonstrate the long-term sustainability and viability of the business.  Other information may be required depending on your personal and business goals.

  What will the bank be looking for when considering a funding proposal now?

  As part of our decision to lend, we have always considered on a case-by-case basis the ability of each farmer to operate an effective and sustainable business.

  There is an expectation these businesses should be profitable and that farmers should be able to work towards paying back loan principals.

  Understanding the current position, outlook and ambitions of each farming business are essential for banks to ensure they lend in a responsible way.

  This expectation will be the same for existing and new lending and forms the basis of ANZ’s annual review of the businesses we bank.

  What is your advice to farmers as they are preparing for the 2020 season that will make their experience with their bank a positive one and will minimise the effects of this restricted capital environment? What questions should they be asking their bank?

  Talk to your bank, ask how it views your business and what it would like to see for the farm to become more financially and environmentally sustainable.

  Be open with your bank about your concerns and needs. Like ANZ we’d expect all banks view to themselves as partners in their customer’s business and want to have clarity around the things that worry their customers so they can help and be part of the businesses success.

  Ask for advice and work with your farm consultant and accountant to make sure you have access to accurate on-time information on the business and its performance.

  Where possible, pay down debt. Depending on other factors affecting your business, we’d expect this to increase your equity, strengthen your balance sheet and make your business better able to weather the ups and downs of the commodity cycle and deal with costs related to changes in regulation.

  Take time to understand local resource plans and the impact they may have on future spending, especially the potential need to spend on technology and improvements to on-farm assets to meet regulatory and compliance requirements.

  Keep an open mind to new opportunities and technology. In a globalised and connected world there are opportunities to add value by meeting heightened customer expectations over quality, purity and traceability.

  2020 © ANZ Bank New Zealand Limited. This material is for information purposes only and is subject to change. Its content is intended to be of a general nature, does not take into account your financial situation or goals, and is not a personalised financial adviser service under the Financial Advisers Act 2008. You should seek professional advice relevant to your individual circumstances. While ANZ Bank New Zealand Limited (“ANZ”) has taken care to ensure that this information is from reliable sources, it cannot warrant its accuracy, completeness or suitability for your intended use. To the extent permitted by law, ANZ does not accept any responsibility or liability arising from your use of this information.

What will you be looking for when considering funding proposals? 

Mark Steed, Westpac NZ.

Mark Steed, Westpac NZ, head of commercial & agribusiness

When considering all funding, we’re assessing the business’s long-term sustainability and its ability to generate sufficient cash surpluses over the life of the lending that:

• covers all interest payments due and,
• repays the principal in the agreed term.

An emphasis is placed on environmental considerations, adherence to regulations and/or any consents required to operate the farming business.

We calculate the minimum principal repayments using a maximum tenure of 25 years.

We also consider:

• the business’s history and principles
• its performance, both productively and financially, and its all-round business acumen
• the nature of the farm and farming system, including physical or environmental challenges
• the quality and performance of the livestock.

We work to understand our customers’ future strategies and aspirations to ensure we continue to provide fit-for-purpose services.

• See the answers Mark from Westpac gave to each question

  The environment has changed with respect to access to capital, where has this change come from and why?

  Access to capital and the pricing of risk is not a new phenomenon, as they ebb and flow through asset classes and the cycles.

  While Westpac is still considering the full implications of the new RBNZ capital rules, we remain optimistic about the dairy sector and are open for new and existing business within the primary sector.

  Westpac believes the dairy sector offers a relatively stable long-term proposition and while we are not seeing the demand for lending that we’ve experienced over the past decade, we’ll continue to support our customers and offer them as much certainty as we can.

  What will this mean for dairy farmers?

  Those dairy businesses performing on a consistent basis, who are well managed and governed, should see little, if any, change in their banking relationship.

  It is however, too early to say what implications there will be for pricing of debt, other than to say at Westpac we regularly monitor our pricing in relation to market conditions and this includes regulatory requirement changes. Some farmers may pay more as a result of changing conditions, but there won’t be any immediate changes to our lending policy.

  Do you have additional requirements around environmental impacts, or other non-financial KPIs that you are trying to implement that farmers should be aware of?

  We want to help customers address their environmental concerns and we are increasingly assessing environmental risk when looking at new credit propositions.

  Farmers should focus on ensuring the correct consents are held and remain compliant. Similarly, an awareness of how environmental rules and requirements in their region are changing is also important.

  We’ll be keen to understand what changes may be coming for specific farms to align with local District Plan changes. We also expect to see forward projections taking account of where future expenditure may be necessary to address these changes.

  What are the key pieces of information a farmer should provide when putting a funding proposition forward to the bank?

  Westpac’s approach to assessing credit propositions hasn’t changed, as all proposals need to demonstrate a clear cost benefit analysis and show how they fit into the broader plan of a long-term underlying business strategy. Like any operating business with gearing, they should demonstrate a clear ability to generate cash to repay the loan and its associated interest cost over an acceptable period.

  A 25-year payback period for the repayment of core debt principal is used to assess the long-term viability of any funding proposal. The better we understand your business, the better placed we are to offer advice and consider your lending application.

  Specific information we require remains unchanged from last year. It includes:

  • Three years accountant produced financial statements, together with customer/independently prepared budget forecasts out a minimum of 12 months;
  • Annual budgets must be based on actual financial commitments;
  • Any interim / year-to-date management financial reporting that is current;
  • A separate capital budget may be required in some instances;
  • A current livestock reconciliation;
  • Details of all the farm consents (where required) and evidence of their compliance;
  • A registered property valuation may be required. In all cases the farm will be visited and inspected by a Westpac Agribusiness Manager.

  What will the bank be looking for when considering a funding proposal now?

  When considering all funding, Westpac considers the long term sustainability of the business and assessing its ability to generate sufficient cash surpluses over the life of the lending that a) covers all interest payments due and b) repays the principal in the agreed term. An emphasis is placed on environmental considerations and adherence to regulations and/or any consents that may be required to operate the farming business.

  The minimum principal repayments required are calculated using a maximum tenor of 25 years.

  Other aspects Westpac considers are:

  • The history of the business and its principals;
  • Their performance both productively and financially and their all-round business acumen, for the type of business they operate;
  • The nature of the farm and the farming system operated upon it, including any physical or environmental challenges;
  • The quality and performance of the livestock and horticultural stocks. All lending is considered in this way, whether it’s new-to-bank or existing customer lending. Westpac Agribusiness Managers spend a lot of time with their customers, working with them to gain a solid and deep understanding of their business. We work to understand our customers’ future strategies and aspirations to ensure we continue to provide fit-for-purpose services.

  What is your advice to farmers as they are preparing for the 2020 season that will make their experience with their bank a positive one and will minimise the effects of this restricted capital environment? What questions should they be asking their bank?

  We encourage all farmers to have regular and thorough discussions with their bankers on all matters concerning their business. We look forward to meeting our rural customers to discuss their plans for the year, their challenges and their expectations around performance.

  In a low-interest environment, it makes sense to reduce debt as much as possible. While we don’t insist all dairy farmers make principal repayments, it makes sense for those with higher leverage to reinvest back into their business and improve their balance sheets. These actions also make sound provision for any future adversity that might come along. Debt structures and loan terms will often reflect these priorities and can also make provision for repayment of debt that results from larger than expected cash surpluses, generated by good trading seasons.

  We encourage farmers to ask questions around pricing, terms and any additional requirements the bank might have, such as regular provision of financial and production records for review. When will these be needed, how often and in what format? When do annual financial accounts need to be presented? Discuss what other requirements may arise on farm during the year (such as consent renewals). Be curious – open and honest conversations will benefit both parties in the long run.

What information should a farmer provide when putting forward a funding proposition, and has this changed?

Tim Deane, ASB Bank.

Tim Deane, ASB Bank, executive general manager business banking

We haven’t changed our credit assessment process, which requires:

• a business plan, including goals and aspirations
• financial statements – demonstrating historical and present performance
• an asset and liability statement – current and projected
• detailed budgets and cashflows demonstrating an ability to withstand adverse movement in key financial drivers e.g. milk price, interest rate and changes to costs
• physical farm data, including production, stocking and farm system information
• risk management and governance policies.

• See the answers Tim from ASB gave to each question

  The environment has changed with respect to access to capital, where has this change come from and why?

  Access to debt capital has tightened for a range of reasons;

  • The dairy sector is moving into a maturity phase following over 25 years of growth in milk production and land values. As a result, there is less demand for new debt capital for growth.
  • Despite being around three years out from the bottom of the last milk price cycle, recovery for some famers has taken much longer than expected. Changes to on-farm costs and compliance activities have also impacted profitability which is stalling recovery for some. As responsible lenders, banks will be mindful of ensuring customers are able to service additional new debt.
  • Commodity prices are strong and interest rates are at a historic low. At this point of the cycle borrowers should take less risk so they are better able to withstand the impact from a negative change in either of these two key financial drivers. Banks tend to take less risk at the top of the cycle (and take more at the bottom) because this approach supports good customer outcomes in the long term.
  • The recent RBNZ changes to bank capital requirements mean that banks will need to hold additional capital against lending, including agricultural loans. This will increase lending costs, and likely also make loan rates more sensitive to the underlying risk profile of the borrower. However, debt capital will continue to be available to good-performing farming businesses.

  What will this mean for dairy farmers?

  ASB is committed to the dairy sector and we are continuing to actively lend to both existing and new customers who have strong and well-performing dairy businesses to support their growth ambitions.

  Access to bank funding has always been contingent on proven performance, a solid business plan and the right mix of assets to deliver on the plan. This won’t change. 

  Do you have additional requirements around environmental impacts, or other non-financial KPIs that you are trying to implement that farmers should be aware of?

  ASB requires farmers to show they comply with national, regional and local rules and frameworks. Our lending process also involves understanding the steps being taken to address any gaps in these areas and associated costs, as well as ensuring that the assets and resources available can support the farming operation or system they are intending to run.

  What are the key pieces of information a farmer should provide when putting a funding proposition forward to the bank?

  ASB hasn’t changed its credit assessment process, which uses the following to assess a funding request:

  • Business plan including goals and aspirations
  • Financial statements – demonstrating historical and present performance
  • Asset and Liability Statement – current and projected
  • Detailed budgets and cashflows that demonstrate an ability to withstand adverse movement in key financial drivers, e.g. Milk Price, interest rate and changes to costs.
  • Physical farm data including production, stocking and farm system information
  • Risk management and governance policies

  What will the bank be looking for when considering a funding proposal now?

  In addition to the information in question four, we also assess a customer’s financial resilience. This means that they are;

  • well-capitalised
  • able to cope with adversity if one or more key financial drivers change
  • generating sustainable cash profits
  • amortising debt over sensible time periods (usually less than 20 years)
  • well-governed and managed
  • able to show good risk management with a policy and procedures in place
  • compliant with environmental regulations and have a plan to address any gaps.

  The criteria we use to assess a new loan is the same for both existing and new customers, but because we have a history with existing customers it can be easier to collect the information and make a decision.

  What is your advice to farmers as they are preparing for the 2020 season that will make their experience with their bank a positive one and will minimise the effects of this restricted capital environment? What questions should they be asking their bank?

  If you haven’t already, put aside some time to gather the above information and ensure you have as many of the above points covered as possible. Invest in some external advice to help prepare if you need to.

  Then, have a chat to your bank about your business, how they view it, how they assess its resilience and, if required, what you can do to improve it. The appetite to take risk is personal to the borrower and also to the bank. If there is a gap between the risk you want to take and that which the bank is prepared to take, try to see if it can be closed. If it can’t, carefully consider whether trying to find additional equity or alternative debt is the right thing to do for your business at this time.

  It’s useful to get a clear picture from your bank on their long-term commitment to the dairy sector. If you are an ASB customer, you can be assured we are in the dairy sector for the long run and continue to support our customers.

Do you have additional requirements around environmental impacts? 

Dave Handley, BNZ.

Dave Handley, BNZ, general manager agribusiness

Farming businesses with strong balance sheets and robust environmental strategies will be well positioned for future success.

We expect our clients to be taking the necessary steps to ensure they’re environmentally compliant. We’ll be working with our customers as they prepare and deliver on their environmental plans.

We strongly suggest you develop a thorough business plan as your roadmap for the future, and consider how your farming operation will make the most of the current good payout to build a more sustainable business (e.g. by reducing debt, making necessary compliance related investments, or whatever else is critical for your future success).

• See the answers Dave from BNZ gave to each question

  The environment has changed with respect to access to capital, where has this change come from and why?

  At BNZ we invest and lend for the long term, and are committed to backing good agribusinesses. That hasn’t changed. However, we are operating in a capital constrained environment and are taking a prudent approach to lending and investing our capital. 

  What will this mean for dairy farmers? 

  We appreciate that the last few years haven’t been easy for farmers. The sector is highly leveraged, and some farmers are catching up on deferred expenses from the lower payout years.  We are committed to working with our dairy farming customers to build businesses that are sustainable in the broadest sense of the word.

  We are encouraging our customers to take advantage of this good milk payout year to chip away at their term loan balances through principal repayments.  BNZ takes great pride in our dairy farming customers that are demonstrating best practice on-farm environmental management, and we will continue to work closely with our customers who still have work to do on their environmental plans and compliance.

  Farming businesses with strong balance sheets and robust environmental strategies will be well positioned for success going forward.

  Do you have additional requirements around environmental impacts, or other non-financial KPIs that you are trying to implement that farmers should be aware of?

  As mentioned above, we expect our clients to be taking the necessary steps to ensure they are compliant with environmental legislation and regulations.  We will be working with our customers as they prepare and deliver on their environmental plans.

  What are the key pieces of information a farmer should provide when putting a funding proposition forward to the bank?

  We cannot stress enough the importance of preparing a budget.  It is a foundational document that allows the bank and farmer to clearly understand the likely financial performance of the farm, and ultimately to ensure everyone is on the same page.  

  We are encouraging our farmers to develop three year budgets including their cashflow, balance sheet and key assumptions. Some farmers may prepare this on their own, or they may prepare it in conjunction with their accountant or farm advisor.

  What will the bank be looking for when considering a funding proposal now?

  We back good owners, with clear business plans who run sustainable farming operations. Personal factor remains very important, and is considered in conjunction with cashflow viability, equity levels, ROE and the amount of security offered to the bank (amongst other things).  

  Cashflow generation must be sufficient to repay the debt through scheduled principal repayments within a reasonable length of time (payback period). 

  What is your advice to farmers as they are preparing for the 2020 season that will make their experience with their bank a positive one and will minimise the effects of this restricted capital environment? What questions should they be asking their bank?

  Communication is key. Keep in touch with your bank regularly and expect your banker to do the same. Discuss business decisions you are considering with your Agribusiness Banker as it reduces any surprises.  It also helps your bank develop a deeper understanding of your business and the direction you want to take it so that we are better placed to support you on the journey.

What’s your advice to farmers as they prepare for the 2020 season? 

Bruce Weir, Rabobank.

Bruce Weir, Rabobank, general manager country banking

We recommend that farmers build evidence of a clear business strategy showing the intended direction of their business, and how this will be achieved.

Their evidence should include:

• cashflow budgets including any capital development projects
• information relating to how incoming regulation is likely to impact their business, and how any impacts can be mitigated
• completed Farm Environment Plans where applicable.

And, these are the questions they should be asking their bank:

• What is a sustainable level of debt for my business?
• If I want to grow my business, what do I need to do?
• Where can I access relevant information?
• Are there additional sources of advice/training/support I should tap into?
• How can I upskill myself and my staff to tackle future challenges?

• See the answers Bruce from Rabobank gave to each question

  The environment has changed with respect to access to capital, where has this change come from and why?

  The reduction in availability of capital across the New Zealand banking industry is largely due to the flow on effects of regulatory changes stemming from the Global Financial Crisis (GFC) and recent inquiries into banking conduct and culture in New Zealand and in Australia.

  Recent changes, which have tightened capital availability for New Zealand banks, include –

  • Policy changes requiring NZ banks to source more of their funding from retail deposits and long-term wholesale markets
  • Tighter rules relating to foreign investment in agricultural land brought into effect in late 2017
  • Capital constraints on the offshore parents of NZ banks

  The RBNZ review of bank capital levels kicked off early last year, and concluded in December with the announcement of changes which will also impact on capital availability. While not yet in effect, these new rules are anticipated to reduce access to capital in the agricultural sector as banks prioritise capital allocation to sectors which are deemed less risky and achieve a higher return.

  As with other NZ banks, these changes have impacted Rabobank NZ with the new capital rules requiring us to hold more capital. Despite this, our strategy and approach to the agri-lending market is unchanged. As a specialist Food & Agribusiness lender, we are fully committed to New Zealand’s rural lending market and our objective is to sustainably grow our rural lending portfolio by supporting our clients and exploring new opportunities with leading food and agribusiness operations.

  This consistent approach has resulted in rural lending portfolio growth over the last 12 months with more than half of this coming from new dairy lending. Importantly, this growth has been achieved within our existing credit risk appetite.

  What will this mean for dairy farmers?

  In conjunction with other regulatory changes mentioned above, the recently announced capital changes will have significant implications for the dairy industry. At an industry level, we expect to see lending decisions increasingly based on strong cash-flow performance and an ability to repay both principal and interest.

  Rabobank is currently working through the detail of the new framework with the RBNZ and the implications for our business.  While we do anticipate these changes will have an impact,  our intention is to continue supporting our dairy clients as well as exploring new opportunities with leading dairy operators.

  Do you have additional requirements around environmental impacts, or other non-financial KPIs that you are trying to implement that farmers should be aware of?

  In recent years, Rabobank has had an increased focus on building a non-financial picture of our food and agribusiness clients’ businesses. This includes collection of information on our clients’ agronomic, environmental, social, and workplace performance.  Collection of this information provides both Rabobank and our clients with a more complete picture of the client’s business and allows us to better help our clients adapt to emerging regulatory requirements and meet the demands of modern markets.

  What are the key pieces of information a farmer should provide when putting a funding proposition forward to the bank?

  The key information sought by Rabobank, from farmers who are putting forward funding propositions, remains largely unchanged from requirements in recent years. As outlined above, the main change relates to an increased focus on non-financial measures.

  Key information sought by Rabobank includes:

  • Business objectives/goals
  • Financial position & history
  • Production history
  • Succession plans
  • Security position
  • Non-financial measures including agronomic, environmental, social, and workplace performance

  What will the bank be looking for when considering a funding proposal now?

  Rabobank is positive about the long-term prospects for New Zealand’s dairy and wider agricultural sectors and our aim is to provide a consistent approach through all phases of the market.

  As a result, our criteria when considering funding proposals have not changed. We are open to new lending proposals from high performing farmers who are able to achieve sustainable profitability, meeting both financial and non-financial obligations.

  These criteria are consistent for both our existing clients and prospective new clients.

  What is your advice to farmers as they are preparing for the 2020 season that will make their experience with their bank a positive one and will minimise the effects of this restricted capital environment?

  When assessing new funding proposals, Rabobank is looking for evidence of a clear business strategy highlighting the intended direction of the business and how this will be achieved.

   This is likely to include:

  • Completed cash-flow budgets including any capital development projects
  • Information relating to how incoming regulation is likely to impact their business, and how any impacts can be mitigated
  • Completed Farm Environment Plans where applicable

  What questions should farmers be asking?

  Any questions should be aligned to the intended business strategy. These may include -

  • What is a sustainable level of debt for my business?
  • If I want to grow my business, what do I need to do?
  • Where can I access key information relevant to my business?
  • Are there additional sources of advice/ support I should tap into?
  • How can I upskill myself and my staff to tackle future challenges related to my business?
  • What industry training is available to do this?

Looking for tools and resources to help you demonstrate anything mentioned above? DairyNZ has a range of business planning and budgeting tools free to use – visit dairynz.co.nz/business

This article was originally published in Inside Dairy March 2020