Right, so we all know what Chinese Whispers is don’t we?  

It’s a kids game where players form a line or circle, and the first player comes up with a message and whispers it to the ear of the second person in the line.

The second player repeats the message to the third player, and so on.

When the last player is reached, they announce the message they heard to the entire group. The first person then compares the original message with the final version.

Mistakes often accumulate along the way, so the last player’s reading differs significantly from that of the first player, usually with quite amusing or humorous effect.

Unfortunately, this can also happen in the Agri credit process.  

And the effect is not humorous nor amusing. It can be downright devastating.      

Credit approvals in Agri all have significant consequences – they are the difference between getting further investment capital or not (which can have significant wealth accumulation opportunities in the future) and at the other end of the spectrum, they could mean the difference between paying significantly more in interest, or even worse, having to divest a farm at the wrong time.

Suffice to say, the stakes are high.

So what has all of this got to do with Chinese whispers?   Well, the Agri credit chain is not a band of one.  

Very rarely does the frontline banker have the sole discretion to make a lending decision. In nearly all cases, this decision will be referred to another authority.  

Often, it goes through at least two other parties – sometimes further.  

All along that journey there is risk that the message evolves, changes or weakens.

And guess what the most important link is – you the farmer – and your start point with what you provide to the frontline banker.  

How and what you provide, frame, analyse and present is a significant determinant to the success of that credit process – and whether you accumulate more wealth in the future, or don’t.  

But the best part about this, is that its easy to control if you know how.

Let’s start by understanding some of the assessment factors that a bank goes through with the credit process.

Now, to the uninitiated eye, a typical credit process looks like this: Have a meeting with the bank, maybe have a tour of the physical assets, provide your past financial statements and your future budgets and make your request.

I was reading an article recently about the traits of some of the most engaged businesses based on a survey by Gallup. It was a global survey and started by noting that, “85% of employees are not engaged or actively disengaged at work. The economic consequences of this global "norm" are approximately $7 trillion in lost productivity”

Keeping in mind the NZ economy is about $USD200BN, that is staggering.

The article talked about the key traits of high engagement companies being:

Having a shared Mission – employees have a clear sense of where they are going and why and feel like they are on a journey together. 

People Development - Hire and set them up for success. Care for them, share information with them, build a plan for them, coach both strengths and weaknesses, and provide meaningful feedback.

Valued Voice: Trust between co-workers and leaders is so high that both sides are open to communicating ideas and information to avoid problems and create new solutions

Earned Trust & Benevolence: They live their core values both internally and with the external market rewarding those who demonstrate them and not tolerating those who don’t. The customer base and employees genuinely believe that the company has their best interests at heart.

It got me thinking about farming

And in particular- how engagement levels have been lowered by financial stress (albeit now improving) and now increasing compliance - something highlighted in KPMG’s recent Agribusiness agenda with the following statement “ a sector that is fatigued, straining to cope with the wide range of issues that is having to respond to on a day-to-day basis with morale falling”.

So, what does engagement have to do with succession?

Well, everything we say.

Knowledge is power.

With that quote deeply in mind, we are proud to introduce the "NZAB Agri Bank Dashboard".

It's a quarterly snapshot on all bank movements, with source data from RBNZ.  

Why is this important? 

Well, understanding the forces at play in each bank gives us very strong direction on how we help our farmers more easily access capital, who from, plus the likely costs of that funding.

It also saves time for our farmers and puts energy into the right parts of your credit process, rather than chasing shadows in an increasingly complex world.    All of this so you can focus on what you do best- running your own strategy and your business effectively.

We'd love your feedback. 

Anything that you think might be useful, we'd love to hear from you!

We'll add to this dashboard over time - including things like a bank appetite index (diving deeper into each banks metrics for viability and security assessment). 

We'll put this out quarterly from here.

The version below is with data to the 31 March 2021.

The interest cost that you pay as a farmer is one of the biggest costs on farm that you will face. It is right up there with your feed/grazing bill and your wage bill. Suffice to say, it should demand your attention.

We are in a great period, with farmers enjoying some of the lowest rates ever.

However, whilst those rates have dropped substantially over the last few years, the range of rates being offered to different farmers in the market is now incredibly wide versus history.

Farmer A could easily be paying double that of Farmer B.

Within that we are also seeing some significant change in the components that make up your interest rate and can see some interesting movements coming up as bank appetite shifts into the positive territory.  

How you take advantage of that will require a specialised approach.           

Firstly, lets start with what makes up your interest rate.

To illustrate, let’s narrow this discussion to only floating rate lending.

Your floating interest rate is made up of three things - The underlying “base indicator”, the banks’ “liquidity costs” and the banks “customer margin”.

It’s that time of year when we’re finalising budgets for FY 22 and the ultimate question on all dairy farmers lips is: “what payout do we use for budgeting next year?”  

It is a much different landscape entering into FY 22 than it was in FY 21.   This time a year ago we were knee deep in COVID-19 and incredible uncertainty was evident in all parts of the world economy.  A common trend amongst most bank economists were milk price forecasts leading with $5 in front of it. When Fonterra finally delivered their opening forecast of $6.00+, it was met with mild jubilation (albeit noting the very wide range offered).

What a turnaround it has ended up being. At $7.60, being the current mid-point (milk only) with a sense of some upside potential, its going to be the second equal payout of all time.

As you know we are very interested in the “why” when banks show differing levels of appetite in the Agri Sector.  

By understanding the “why” from a bank perspective allows farmers to better understand how they should navigate their credit and negotiation processes with their bank.

Knowing this allows our farmers to more effectively separate their strategy from what is good for their business and what is good for their bank which can, at times, be quite different things.

This short article looks at the impact of differing bank strategies since 2007 when lending took off quite aggressively in the Agri sector with the first “whole milk powder boom” and the very challenging volatility that followed.

These first graphs show how much capital each bank has leant to the Agri Sector (in total), since 2008.

We are in very interesting times right now.  

There are some big forces about to play out in the main trading banks operating in New Zealand. We believe this will culminate into a wave of capital that the Agri sector hasn't seen for the past 5-7 years.

That wave of capital coming to the Agri sector is going to have some interesting effects on asset values, funding costs and decision making.

2020 was an interesting year for farmers. When Covid initially hit there was significant uncertainty as to the impact on soft commodities, it would be fair to say that things did not play out anywhere near where most market commentators thought or feared, myself included.

Early estimates of a significant retrenchment in Dairy prices were well wide of the mark and even though venison, lamb and beef went backwards, they still didn’t plunge the depths that some might have feared.

Being prepared for all eventualities is a smart thing as a year seems to be a long time in farming and economic cycles these days.

For those of you that managed to get away, we hope you’re well rested and fired up for the year ahead. For those of you yet (but about to) to take a break, we’re now jealous!

As we step into 2021, we thought we’d put out some of the keys to success when dealing with your bank. All designed to ensure you remain in control of your banking process and get the best possible interest rate.   This is not an exhaustive list but will get you started in 2021.