Information only disclaimer. The information and commentary in this email are provided for general information purposes only. We recommend the recipients seek financial advice about their circumstances from their adviser before making any financial or investment decision or taking any action.

The latest financial stability report from the RBNZ brings back to the surface a hot topic for us and our farming and business customers – that being the significantly greater amounts of capital that the RBNZ requires banks to hold when they lend to a farmer or business versus a homeowner.

The main trading banks are required to hold vastly more of their own equity capital against a farming or business loan making those loans much less profitable to make. This leads directly to less lending and higher interest cost margins in those sectors versus home lending.

We warned about the flow of capital going straight to home lending back in 2020 when the RBNZ started its “Funding for Lending” and “Large Scale Asset Purchases” programmes (i.e printing money).  You can find that article here. 

Earlier, in this article, we actively called for RBNZ to proactively make capital changes to help the New Zealand Primary Sector. 

It was clear back then that the RBNZ’s capital rules were (and still are) set up to encourage home lending and discourage farm and business lending.

 

So back to the latest report from the RBNZ

(you can find the full copy here)

Here are some direct quotes from that report:

“Overall, risks to the financial system from the dairy sector have diminished considerably in recent years”

“On average, dairy farmers have repaid around $3 of bank debt per kgMS in recent years”

“Total dairy sector debt has declined by around 12 percent ($5b) since its peak level in 2018”

“[On the Ukraine Crisis]… higher food prices should also benefit agricultural exporters. New Zealand’s dairy and meat stocks are predominantly pasture-fed, and should fare better than overseas grain-fed competitors”

The following graph, produced by the RBNZ, best shows the significant repayments made in the sector and the strong position they’re now in.  

The underpinning Information only disclaimer. The information and commentary in this email are provided for general information purposes only. We recommend the recipients seek financial advice about their circumstances from their adviser before making any financial or investment decision or taking any action.

 

We help manage some c. $3bn of NZ Farming and business loans across NZ so we get to see the picture across all the banks and other funding sources. This gets our customers the best outcome for their farm or business funding.

With all our customers, we are continuously having discussions about managing their interest rates. In particular, this involves managing the drivers of that; the big ones being credit quality, market competition for their loans and also underlying base rate movement.

When we talk about “base rate movements”, we’re talking about the movement in swaps (being the general underpinning of a fixed rate) and the movement in the 90-day bill (being the general underpinning of a floating rate)

There’s a heck of a lot of change in both at present (check out our earlier article on the significant fixed rate differences we were observing between banks) so it’s always worth looking into some of the interesting things happening out there at present.

 

Case in point is this graph below.

This is a graph that shows the average of all of the four main bank’s forecasts (Westpac, ANZ, BNZ and ASB) for the 90 day bill out to September 2023 – at this point all bank’s think this will be the peak of the 90 day bill (The spread of the peak that makes up the average ranges from 3.10% to 3.60%).

We have then compared this to the swap rates for different terms from 1- 5years.

 

After our last article discussing two of the larger drivers of land value change over time (payout and debt availability – you can find it here), we had a bit of discussion about the payout data going back over time.

I thought I’d just pick up on this point with a couple of graphs.

Here is our payout graph (with data sourced from LIC), which makes for interesting reading.

 

As any avid reader of our articles knows, we are always interested in looking at the movement in capital in the Agri Sector - over time, between banks and also the drivers of such availability.

We do this as it helps our farmers and business owners understand how their bank ticks – essential when approaching the credit process or negotiating a new loan.

As we start to see some notable positive changes in recent sale prices for farmland, we thought it would be interesting to look back to see how the movements of some of the drivers of farmland value have looked over time - to pick up clues to what may happen next.

If you want to refresh on some of the earlier articles on this topic, take a look at the below links. It’s interesting to look back and see how some of this is playing out.

A wave of cash is about to transform the agri market

Squeeze the credit balloon and it'll pop out somewhere else

Falling Agri Bad loans give further cause for greater bank appetite

For this article I came across a really good data set* from LIC (Livestock Improvement Corporation) showing dairy land sale price and dairy payouts going back to 1978. There’s some interesting stuff in it and it starts to put some objectivity around two of the larger drivers of land value – dairy payout and bank debt availability.  

*Source data for all graphs in this article is RBNZ, and LIC reports. The LIC Reports source their dairy land sale data from REINZ. The REINZ dairy farm sales data is the median sale price per ha for that year. Some care needs to be taken with the data.   An example here is that in times of low liquidity, lower tier quality assets can make up a larger part of the pool, dragging down the median further than what it otherwise would be – but the trends are still instructive. Additionally, the data set for 2022 is only a part year data set.

First up is this graph, showing Agri debt changes versus land value since 1992.

 

“Men Are From Mars, Women Are From Venus”, was an enormously popular book by John Gray in the 90’s which asserted the notion that men and women are as different as beings from other planets.  

Whilst it was hugely stereotypical, it suggested that male and female communication styles were vastly different and understanding the communication styles of the opposite sex would be advantageous for a better relationship.

I think that the above would resonate with most people, not due to it being the opposite sex, but instead because we’re all simply different people.

When we come from different walks of life, demographics, belief systems and DNA, communication can at times be very difficult.  

And when communication style leads to misunderstanding, this can have very significant impacts in life and in business.

And where we’re increasingly seeing this gap, is in the relationship between the banker and the borrower – which is leading to plenty of missed opportunities for both sides.

This short article teases out the rationale for this a bit further, plus sets out a few tips for how that gap might be narrowed and ensure both sides get what they want.

 

I cast my mind back to when I first started as a graduate Agri banker.

I was 22.

Fresh out of university and equipped with plenty of desire to prove myself to my new employer, I wasn’t short of energy or a lack of training.

Or so I thought.

The reality is that I hadn’t yet travelled the world, hadn’t raised a family, hadn’t started a business, hadn’t seen the confidence building highs of an economic cycle, nor the destroying and lingering impacts of a prolonged downturn.

I didn’t really know much about farm systems. I was still learning about the credit process.

I hadn’t felt genuine loss, nor had I seen what people could really achieve when their livelihoods were at risk or what they might do when backed into the corner.

I thought my graduate training had taught me how to listen.

But it didn’t teach me how to hear.   How to truly understand what a person was trying to say.

How to ask more courageous questions to get more detail out, how to read body language to see if I was on the right track.

How to paraphrase back what I thought I was hearing. How to give people space to think or make choices.

How to know when communication wasn’t working anymore and to stop for another day.

And despite over 20 years in this industry being in front of business owners every day of all sizes and types, and having been through a few cycles, I’m still learning.

 

And it’s got harder.

Bankers can be young and on average they’re getting younger with less experience as more leave the industry.   Farmers and business owners are getting older.

Being young is not a bad thing. As we get older, we may get more rigid in respect to our communication styles and be less agile to the changing style of communication.   This is not a one-way street. Older is not better than younger and vice versa.

But those same bankers are now managing more clients, more complexity and navigating more regulation meaning less time to be able to understand and develop those relationships and communication styles.

Additionally, bank relationships change more frequently so there can often be an entire reset of what you’ve been used to as a new person starts from scratch and may have an entirely different style.

Today, communication can be via a mix of email, phone and in person.   When one side is used to that, that’s fine, but the other side may not be. We’re all different in respect to how we learn or accept information most easily- reading, writing, seeing, doing.

Just as an email lacks tone and instant feedback, leading to a lack of empathy, a phone call can lack necessary detail and lead to quite different levels of interpretation.

 

But none of this is new and it’s not particular to the Agri sector.   So how do farmers or business owners bridge this gap?   And why should you?

Well, the “why should you” is probably obvious. Your interaction with your banker is often at a time when there is a significant capital transaction about to occur.   Or it might be a review of facilities under the cloud of a less than stellar year.

Get this wrong and that will lead to a lost opportunity.   Get it really wrong and taint can build which can accumulate, starting from poor pricing on your loans to losing serious equity.

At NZAB, we have cases every week where poor communication on both sides has led to exactly that.

 

So here are some tips for bridging the divide.

1. Communicate in multiple ways, multiple times

Someone wise once said to me that to effect real change, you need to communicate with your audience seven times, seven different ways.

Now I’m not advocating for that level of intensity, but if it’s important, double up on the style.  

If you’ve had a good phone call, follow up by email with the key points.   If you’re about to send a detailed email, preface it with a phone call to set the tone.

 

2. If its really important, don’t put something up for consideration half-baked.

We have saying in NZAB: “leave nothing to chance”.   This means that the proposal we deliver alongside the customer covers all aspects of the credit process, not just part of it.  

This doesn’t mean that you can’t have earlier positioning or informal meetings with your bank to set the scene for a later formal proposal, but make it clear that’s what these meetings are for – and that a formal request will follow. Make sure the eventual request covers all credit bases in a professional manner.

 

3. Check for understanding

This is obvious but done infrequently.

Paraphrase back during conversations. Paraphrasing is taking what you think the other side is saying and then saying it back to them in your language to check understanding.

After an important meeting, check back in the next day to see what the other side thought of the meeting and what they thought the key points were.   This is also a chance to see if there has been any different thinking since the meeting, particularly for those whose thinking is more reflective than impulsive.

 

4. Have more than one person in the conversation, particularly in person.

We all interpret the spoken word quite differently.

I’m not surprised anymore when I ask customers after a bank meeting what they took out of the meeting only to hear several interpretations of what was trying to be conveyed.

Also, when you’re in a meeting, you’re not going to spot all body language yourself.   Having a second person can create space in a meeting to observe and to reflect before re-engaging.

 

5. Be confident and direct, but frame up well

This goes for both bankers as much as their customers and us as their advisors.  

Too often, there is a fear of hurting the relationship by approaching difficult discussions far too delicately.

I’m not advocating for racing straight in with your messaging (or your request) like a bull in a china shop, but being too delicate can see the message not being received which can be much worse.  

Much worse for the bank might mean a loss of a customer or much worse for the farmer may mean the loss of an opportunity to grow.    

Be upfront on both sides with your needs.  

 

6. Don’t come into a meeting with a pre-determined position.  

This might seem at odds with the above, but its not.

Circumstances change, things develop and conversation can bring ideas forward that may not have existed before.   Staying open minded and allowing ideas to flourish is powerful when done well.

However, good framing about what “mode” you’re in is important to allow this; If one side is scared that allowing a conversation to grow into an area they can’t support, then they may not entertain the conversation in the first place.

Alternatively, acknowledging upfront that this is simply an exploratory conversation, rather than being in “execution mode” can increase contribution significantly.

 

7. And lastly, recognise that we’re all different and misinterpretation can happen

This is acknowledging that no matter how good we might get with our communication, we’re all going to have an off day or we’re always going to miss something.

We don’t know what happened to either side just before the meeting, or what might be playing on someone’s mind, impacting their style that day.

So, bear that in mind before we rush to judgement

 

You will all have your own tips here, we would love to hear them!

 

 

A quick graph of ours for you to look at.

Below is the percentage of all loans that are on principal and interest (P&I) in the Agri sector, plotted against the amount of Agri loans outstanding -all since 2016.

All Agri loans are generally put into three categories by the Reserve Bank of NZ;

1. P&I Loans- these are steadily reducing on a scheduled repayment basis.
   
2. Interest only loans – these are as they sound- interest is only payable during the term of the loan and the loan amount is outstanding at the end.
   
3. Revolving credit type loans. These are typically overdraft or other working capital facilities, but sometimes are term debt based as well. Typically, they are interest only, although all profit proceeds generally go into these accounts in the first instance.