A discussion with The Government about Agri Lending

Following our submission last year in support of the Inquiry into Banking Competition (and in particular- Rural Banking),  NZAB were invited to speak to the Finance and Expenditure Committee directly last week at Parliament.

It was an interesting process and we were grateful for the privilege to speak directly to some of the decision makers on the factors that will either enhance or detract from that flow of capital into New Zealand farming.   

We took questions and had a good discussion with all sides of the political spectrum.  The questions were of a very high quality from all sides and the only wish we had at the end was that there was more time to build further on those discussions!

We thought it would be useful if we share the video of our presentation and questions with you all - you can find the link here. NZAB (Scott and I) start at minute 36.50.

We take our purpose of getting more sources of competitive capital for New Zealand farmers very seriously. We now watch with interest for any changes the Government intends to make.

Already Minister Nicola Willis has written to the Reserve Bank of New Zealand in December last year, outlining "my expectations as to how the RBNZ takes competition into account when setting prudential regulations" (this is code for: we want less barriers to competition).  Among other requests, she specifically asked the RBNZ to consider changes to the agricultural lending capital requirements ("risk weighted asset requirements").    

The agriculture sector will need increasing capital investment in the coming 10 to 15 years in order to ensure we:

• Maintain our competitive advantage internationally
• Meet our environmental obligations, and
• Enable the transition (sale) of farms between generations
• Ensure regional New Zealand remains invigorated.

But alongside this, we have a heavily regulated banking sector that is resulting in the following:

• Higher interest rates charged to farmers to derive better bank capital ratios
• Reducing head count of bank staff
• Reduction in risk appetite for Agricultural loans
• Channeling of debt capital into easier home loans.

In addition, material limitations have been placed on farmers accessing foreign direct investment which has also led to capital constraints in the sector. These settings are at levels below our trading competitors. Meaning the required investment into enhanced supply chains to access higher value revenue is not flowing to New Zealand and is instead going elsewhere.  This is a double-edged sword as it leads to a reduction in domestic capital that is competing and participating alongside one another.

The net result for farmers and farming businesses have been:

• Less bank competition, higher interest rates, decreasing viability, and an inability to access the right long-term capital for their business.
• Nonproductive assets classes such as housing have significant increased in value, but Farm business asset values have flattened, reducing the desirability of farming as an asset or investment class, leading to a restraint on further investment.

Without change, we see the potential for a significant ‘funding gap’ opening up over the coming years where farmers are unable to access the capital needed to meet these future needs. We consider this gap will grow to as much as $10-15bn over the next 5-10 years.

Failure to fill this gap with the necessary capital will have a significant impact on New Zealand’s ability to increase exports, close the current account deficit and continue to maintain New Zealand’s relative GDP vs its peers.

We recommend the committee consider the following solutions (or variations of such), which we address in more detail within this paper.

1. Consider changes to regulatory capital requirements for farm lending for existing deposit taking lenders to better reflect the actual lending risk profile versus other forms of lending like housing.
2. Consider capitalising Kiwibank with new capital, directed solely for Agri Lending.
3. Consider changes to regulatory capital requirements for farm lending for new deposit taking lenders to better reflect the actual lending risk profile versus other forms of lending like housing.
4. Encourage new lenders to New Zealand - both new mainstream bank and private capital lenders.
5. Encourage more foreign direct investment into the New Zealand agriculture supply chains by revisiting OIO settings and ensure they remain consistent over time.
6. Encourage farmers to continue to enhance their businesses to attract capital and adopt a competitive mindset when dealing with their banks.

As always, we welcome your own views, so please feel free to email us back for a discussion.