NSW Farmers held a competitiveness forum in Tamworth this week where a number of speakers and participants tackled the issue of farm profitability,
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This was in the context of the federal government’s white paper on the competitiveness of agriculture and also the ongoing public discussion on the level of rural debt.
It is this latter area that poses an interesting question. Is the level of rural debt too high?
Much has been said lately of the escalating rural debt with levels increasing from $16.8 billion in 1994 to $64.3 billion in 2013.
Interestingly this level has plateaued since 2009.
So how much debt is too much debt?
Some debt is necessary. It provides external finance to support development and investment, increasing the ability of industry to improve productivity and hopefully profitability.
Apart from debt the other alternative to attracting additional finance (and some reports suggest Australian agriculture needs an additional $800 billion in the next 35 years) is looking at equity – another interesting topic.
The quantum of debt itself may not be the problem while property values hold to ensure financiers maintain their security interests.
The serviceability of the debt is probably the bigger question in the context of discussions on the profitability of the industry.
Looking at debt as a proportion of gross production we can see Australia’s rural debt to gross value of farm production ratio has increased from 68 per cent in 1994 to 131pc in 2013.
In the US where total farm debt is US$316b this ratio is about 84pc.
Interestingly information was provided to our forum at Tamworth explaining 70pc of the debt was held by 12pc of the industry and the majority of these are the larger, higher performing farms.
Looking at the interest cost to income ratio, the higher performers have a ratio of about 8pc, while the lower performers have a ratio of 12pc.
One of the take home messages of the forum is farmers need to take greater ownership of their loan application process.
Financial institutions are selling financial products and therefore will structure loan applications to fit in with their targets and exposure areas.
For farmers to ensure the debt financing they are seeking is in the best interest of their business, they need to completely understand what they are getting into.
We will be raising this and many other factors on farming profitability in the agriculture competitiveness white paper process.
