Our Insights

Start controlling your banking in 2021 with these keys to success.

Jan 21, 2021 9:01:48 PM / by Andrew Laming posted in Debt, Action, Planning, Budget, Banking, Strategy

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Welcome to 2021 everyone!

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.

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Now is the Time to Revise – A Case Study in the Power of Re- Forecasting Your Budget.

Jan 19, 2021 1:00:51 PM / by Chris Laming posted in Debt, Action, Planning, Budget, Banking, Strategy

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Now is the time to revise your cashflow forecast for the remainder of the season.

If you are a follower of our insights, you’ll know how important it is at the start of the season to meet with the bank and present your budget together with the key strategic initiatives, for the year ahead.

Being nimble and responding to change in the assumptions that made the original budget, is equally important.

Being better informed about where your business is right now, and what that means for the rest of the season leads to better on-farm decisions.   This leads to better and earlier decisions around both “defensive actions” or “investment thinking”

Keeping in mind your original budget is locked and loaded, necessary changes for the remainder of the Financial year can be made in a “Revised Cashflow Forecast”.

When is a good time to review? - All the time!

We’re always reviewing clients forecast based on changes to performance or external factors and checking the impacts of those changes on the cash position of the business, and ability to meet obligations. However, now is probably one of the most important times to look at it.

Your original budget is likely to be based on Fonterra’s opening forecast of $6.15, with a production curve similar to last year, interest rates possibly higher than they are now.

Payout is now $6.80, Canterbury’s production has had an excellent start to the season, but a difficult October, interest rates continue to fall, and the budgeted export heifers may not go. There’s a lot to think about.

A Case Study: Pro-active forecasting leads to higher farmer confidence and better bank discussions.

Below is a recent example of a Customer’s revised cashflow completed after a thorough diagnostic on the remainder of the season:

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“ESG” – a growing opportunity to protect and improve your bank margin

Jan 19, 2021 12:51:48 PM / by Tom Laming posted in Debt, Action, Planning, Budget, Banking, Strategy

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My daughter turns six later in the month, so to celebrate we had a big gathering of friends and family over the weekend. Thankfully no injuries on the bouncy castle (this time!).

Naturally the conversation turned to the recent election, but also the potential impact on farming from the National Environmental Standards released earlier in the year, especially given the election result and a continued swing to the Left.

I won’t begin to go into the detail of the standards, nor the potential options to manage and mitigate the potential impacts (nor our respective political views!).

What I would like to do is talk more broadly about what we at NZAB are seeing as the key themes in this space, and the potential impact on farming businesses and their ability to access capital going forward.

 

What is ESG? (Environmental, Social, Governance)

You will have no doubt seen or heard this acronym in the last while. Environmental, Social and Corporate Governance refers to the three central factors in measuring the sustainability and societal impact of an investment in a company or business. For investors, bankers, regulators and governors of businesses across all sectors, it is an increasingly important aspect in how they assess the future performance of companies (return and risk).

We’re seeing the impact of this already in loan pricing

In September 2019, Synlait Milk accessed a $50m loan from ANZ Bank that has its pricing linked to the ESG policies and performance of the company. This is a clear demonstration of how Bank’s are looking to incentivise good performance in this space, on the basis that it knows that key risks are being managed, but also that the business may reap economic benefits.

Similarly, the Auckland City Council has gone to the market recently, raising $500m via the issue of a “Green Bond” – essentially accessing funding on a long-term basis that is allocated to council projects with an environmental or sustainability focus.

The world is awash with so called “green money”. This pool of relatively cheap and long-term funding looks set to continue to grow.

Consumers are already valuing products that have great ESG fundamentals

You don’t have to go too far in the media at the moment to find examples of companies looking to leverage what they are doing environmentally to help appeal to consumers.

Recent examples include Fonterra’s Carbon Zero Milk; Anchor with plant based milk bottles; Southern Pastures purchasing Lewis Road Creamery outright as it looks to leverage its 10 Star Values Program; Bostock Chicken and its Bio-degradable Meat Packaging - the examples are endless and show the value consumers are starting to place on good practice in this space.

These are positive innovations and reflect a focus from NZ producers on meeting consumer needs, whilst hopefully driving higher returns within the farm gate. We are well placed as a sector to take advantage of these changes in consumer preference, the rewards represent the carrot rather than the stick.

So what about ESG in the Banking Sector?

As illustrated via the Synlait example, Bank’s are starting to put a much greater focus on both their clients, and their own, environmental and social policies.

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Thank You!

Dec 24, 2020 2:23:54 PM / by Scott Wishart posted in Debt, Action, Planning, Budget, Banking, Strategy

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As another year draws to a close, I just wanted to take this opportunity to thank all our clients and industry professionals who have supported us this year. You keep us motivated, engaged, and at the top of our game.

As I reflect on the successes, I am incredibly proud that we have been able to continue to grow our business and support more of the industry. We added seven staff this year, with two more starting in January, opened a new region and began investing in technology and systems to provide an even better banking outcome.

We are really excited about what is ahead.

The Agri sector has grown and thrived off the back of long term, stable thinking and in a year that has felt like an incredible amount of short-term decisions have been made it’s important to stop, reflect and remember the journey that you’re on and celebrate the steps you have taken towards achieving that overall vision. You might find you have gone further than you realised!

As Cam Black has written for us in his first article below - as an industry, we can be hard on ourselves and it's so important we stop once in a while to smell the roses.

Have a safe and enjoyable Christmas and New Year, and we look forward to working with you all again in the 2021

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NZ Debt Growth Distribution Shocker - C’mon NZ Banks and RBNZ!

Dec 15, 2020 4:35:11 PM / by Andrew Laming posted in Debt, Action, Planning, Budget, Banking, Strategy

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Hate the Game, Not the Player. Spare a Thought for the Frontline Banker.

Dec 9, 2020 11:47:49 AM / by Andrew Laming posted in Debt, Action, Planning, Budget, Banking, Strategy

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Andrew Laming, Director, NZAB

Imagine this scenario for a moment.  

You’re a dairy farm owner

Your dairy farm manager is doing your monthly feed wedge and he notices that there is a gap in supply and demand due to a poor start to the pasture growth in the month.  

But it is an easy and logical fix - he tells you that he needs to put a bit more feed in plus change the ratio of the feed mix. You do the numbers with him and it all makes perfect sense and delivers a tidy little profit.

So you, as the farm owner, go and speak to your feed supplier about getting some extra feed and possibly a slightly different mix.   

Your feed supplier knows a lot about dairy farming and a lot about feed.   

He knows that putting that feed in will make more profit.  

However, your feed supplier is not sure whether he should sell you that feed as he might be able to sell that feed for a better profit somewhere else.  

He is also a bit wary of selling feed to you, because you are a dairy farmer and he sells to a lot of dairy farmers already.    

You have always paid their bills, there is no issue there. Your farm is also having a fantastic year.   But your feed supplier is not interested in this.  

Eventually after plenty of time has passed and many discussions back and forth, you finally manage to agree with the supplier to get some feed - but only getting about half of what you need and it's also not really in the right mix ratio to get the most optimum performance.    

But you accept it - as what else can you do and its better than nothing.

The dairy farm owner goes back to the manager and tells him the news.  Rightly so, the farm manager cannot make any sense of this.

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Will the banks pass on the RBNZ’s cheap funding into the Agri market or are they going to keep fueling the housing market at the expense of the NZ productive sector?

Oct 30, 2020 1:41:41 PM / by Andrew Laming posted in Debt, Action, Planning, Budget, Banking, Strategy

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Andrew Laming, Director, NZAB

By now you will have probably heard about the RBNZ’s “funding for lending programme” (“FLP”).   Put simply, this is a mechanism the RBNZ is going to use to allow the banks to borrow new (freshly minted) money directly off the RBNZ at whatever the OCR is at the time.    At time of writing this is currently being forecast to drop to as low as -0.5%.

 

The reason RBNZ wants to do this is to stimulate growth in the economy with lower rates.  

 

At present our Reserve Bank Governor cannot guarantee that low OCR levels will be effectively "passed on" with current RBNZ tools.

These days the OCR rate is not linked to the cost of bank funding as it depends on where the market for customer deposits is at.  Which have of late been much higher than the OCR– driven by the laws of supply and demand and the regulations that require banks to seek most of their funding from NZ customer deposits or longer dated offshore lending.  

So a currently low OCR does not equal a banks own funding costs.   Which means it does not equal low cost lending (well, not “low enough”). The FLP is designed to get cheaper funding directly into the market, which by default should lower all forms of funding for the banks.

 

So in short, Mr Orr wants cheap money out in the NZ economy to get things humming again.   Sounds great right?

Well, that depends on where it goes.

So far, the RBNZ has been deliberately non-descriptive about where banks have to place that $50bn .   FLP programmes around the world are not uncommon and learning has shown that the less rules placed on the banks for the “direction of funds”, the more likely that bank’s will use it ( a recent example of this going wrong was the govt guarantee scheme for bank funding -too many initial rules meant very little was leant out initially ).

The FLP may include incentives to encourage banks to use the funds to expand new lending. In other countries, banks have been given a more favourable interest rate or higher funding caps if new lending growth expands. However, the risk of the RBNZ being too prescriptive is that Banks see too much red-tape or complexity making access to the new funding too onerous.

 

In order to predict where funds might flow, let’s step back and consider all the current elements of our banking system in NZ.

  1. We have central bank rules that mean home lending is much more profitable for banks than Agri or commercial loans (Banks have to put far less capital against a home loan = much better return on this investment)
  2. We have banks that are looking to lower overall costs, in particular the cost of their processing.   More, simple deals, more deals that fit into a box, less analysis of complex P&L statements all mean lower cost AI type lending decisioning.
  3. We have banks that are commercially owned. Naturally they want to maximise profit and return to shareholders.

 

So put these elements together with $50bn of newly minted low cost funding thrown into the mix?   I think we can already see that the vast majority of the new funding will be going directly to new house loans.

We’re already seeing this happening in the market, before this scheme has even started.   We can see it in the streets and in the news.   Lines of people at open homes, frequent outlandish examples of auction prices going for above CV and a real air of FOMO with buying houses again.

It's self-perpetuating- more lending to a sector in itself makes the initial lending less risky for the bank.   Chuck more capital liquidity at a market and asset prices will rise.     NZ housing has benefitted significantly from this over a very long time - no different to what Farmland values did when we had double digit increases in farm debt over 2000-2014 (with a break in between for the GFC).

Don’t get me wrong, higher house prices will stimulate the economy.   Higher house prices will make everyone feel better again, spend money, keep jobs. It’ll encourage the construction sector plus all those allied to it. Also, many businesses borrow against their homes as a cheap source of funding.  

 

But can’t we do a little better than this?

Come back to Agri.   This is a sector that is currently experiencing near record profits. Farm cash yields are now averaging 6-8%, way above their long-term trends and way above alternative investments.     Its exporting real stuff.   Stuff that other countries buy and give us money for.   Export receipts. Absolute gold in a world with significant domestic consumption risks and where our key tourism sector looks like it will be in the doldrums for some time to come.

But guess what – Asset prices in Agri have fallen.   And guess why?   In large part due to reticence from Banks to provide more capital to the sector, due to banking regulations that have been inadvertently set up to discourage lending to the sector because of a perception of higher long term risk.  

And just like the housing market, this becomes self-fulfilling, but in a negative way. Less capital to the sector = lower asset prices.

 

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Banking is trending towards deals that only fit in boxes. But when has an Agri finance arrangement ever fit into a box?

Oct 19, 2020 9:28:44 AM / by Chris Laming posted in Debt, Action, Planning, Budget, Banking, Strategy

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Chris Laming, Client Director, NZAB

 

A new “Great Rate”

 

This week, Heartland Bank rocked the market with a new Headline residential mortgage rate of 1.99% for 1 year. This is the first time we have seen a mortgage rate at sub 2%. The market has been clearly signaling a coming drop in the OCR, leading to lower wholesale interest rates to banks. Rates dipping below 2% won’t come as a surprise. Although most of the market were picking that we wouldn’t see it there until early next year.

The interesting part is the criteria attached to Heartland’s offering to qualify for this market leading rate. I think it signals exactly where the banking market wants to go in the coming the years. The deal is simple:

  • Apply and approval online
  • Minimum of 20% deposit
  • Living in the property
  • Wage earner
  • House located in a major centre
  • Standalone, single house
  • Owned personally or joint personally (no trusts or companies)

The deal is simple, fits into a straightforward box, and means the deal origination and approval process can be easily automated.

 

Why can this bank offer this low rate?

 

Ultimately its due a lower cost of the delivery of lending.

The origination and approval process is completed online, and therefore a banker is not required to assess the deal. There is no branch required to house the staff and the customer. There are no additional securities like personal guarantees, and there are no trustees to deal with. The house is located in a main centre which presumably means it’s easier to liquidate if need-be.

Furthermore the lower RBNZ capital requirements already motivate banks towards home lending.

Very simple. Very fast. Very cheap.

The process looks great to the bank’s leaders too, and you can just imagine the conversation “So we can originate deals faster, cheaper, from anywhere, and we can use a smaller labour pool to do it?” It’s a no brainer.

Sounds Great! Surely this must now start having a positive impact on other loans made by the bank?

Wrong!

 

This is going to drive some unintended consequences

This process is driven by the bank’s desire to increase market share in housing, with cost at a minimum, and deliver that strategy through a market leading rate.

This is the start. Simple and easy to manage customers is what they want, and the concept will be adopted by all the major banks.

So what if you live in regional New Zealand?

So what happens if the customer has received legal advice to put the family home in a trust? What happens if the customer is a self employed plumber? What happens if the customer’s situation is slightly more complex than the above?

If you’re outside of the box, you’ll have to pay for that.

 

Implications for the Agri Debt Market

 

NZAB focuses on Agri debt and the best way to obtain and manage it on the best possible terms and interest rate, to suit the customer-led strategy. Agri debt is what we live and breathe, so our major concern is the implications on the Agri debt market.

The Agri debt market is trending the same way as the housing market above. Banks want simpler businesses that fit into boxes. This means lending decisions can be automated and costs less to deliver, and ultimately, if it doesn’t fit, it doesn’t fit. The theory is bankers will be able to service larger numbers of customers. Bringing down the cost of lending.

The problem is, I cannot remember the last time I came across a “Vanilla” farming business. Every single farming business is unique, with its own strengths and its own weaknesses.

 

And furthermore, businesses are only getting more and more complex

 

So the very real implication is this:

If you don’t present your business or your request in a way that the bank understands, its going to be more expensive (at best) or declined (at worst).

Alignment of what a bank is looking for in a credit submission is critical here, and the ultimately the onus will fall on the farmer to make sure the bank understands the transaction or request.  

And guess what; asking for credit is not a process you get a second chance on if you get it wrong. There are real people that sit in credit, they form opinion on what they see first and changing that a second time around can be difficult.

 

Too often we see that process happen badly.

 

In previous articles from NZAB (Click here for further insights), we have talked about credit requests being not just about a budget and some financials.  Its much wider than that and is evolving continually from the banks as they assess the risk of your business in line with changing perceptions.  

One such example amongst many factors, is the accurate assessment of ESG (environmental, social, governance) considerations in each business.  

 

Don’t leave this process to chance, you’ve got too much riding on it.

 

It might mean the difference between acquiring that next farm or not, facing principal repayments that you might struggle to meet, or an increase in interest rate when it should be going down.

Get it right and you'll get your money, get great terms and see your interest rate at near home loan rate levels.

 

Talk to one of our experts today to find out more.

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Holiday Spending, Bank Losses and Where is Agri Lending Appetite Heading to Next?

Oct 15, 2020 2:11:56 PM / by Andrew Laming posted in Debt, Action, Planning, Budget, Banking, Strategy

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Andrew Laming, Director, NZAB

Last week I was fortunate enough to have a week off with the family and we thought we’d do our bit for the South Island tourism sector. Although this meant a different thing to our three girls who thought that retail therapy was their part in the revival!

We went to Queenstown for a few nights before hopping over to Doubtful Sound for an overnight trip and then onto Milford sound for a similar experience.   Queenstown was nicely busy (without being frantic) and the tills and restaurants were ringing.  

However it was a much different experience in Te Anau and Fiordland where the customer numbers were clearly a shadow of their former selves.   Whilst it was nice to have more space, it did fell a bit eerie at times.   If you get a chance, get out and spread the business around NZ, you will not be disappointed!

 

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So you want a better interest rate?

Sep 18, 2020 2:33:01 PM / by Chris Laming posted in Debt, Action, Planning, Budget, Banking, Strategy

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Chris Laming, Client Director, NZAB

Fair enough, interest is your biggest cost and you know there is a wide range of interest rates out there. There is nothing wrong with asking for better terms from any of your suppliers.

 

You’ve been to the bank and asked the question, can I get a better rate? Am I on the best possible interest rate? Can you sharpen the pencil?

 

The issue with these questions is that they require a yes or no answer. Obviously, you would like a yes, but in the current agri debt market, with a lack of liquidity, there is greater power with the bank. That means the default answer is likely to be a no.

 

Chances are, your banker has said something like: “you are on the best rate we can give you…” “you’re on a pretty good rate now…” “we need to hold more capital against your loan…” “we need to ensure we are getting an adequate return on your loan…” or my personal favourite “well, actually we need to talk about your margin going up…”

 

A bank is a commercial entity, just like yours. It is in its best interests to maximise profit.

 

Banks make money against the capital held against the loans they make. Holding capital against a loan is a cost to the bank. The theoretical cost of that capital is something you have no control over. You do, however, have some control over the amount of capital a bank will hold against your loan.

 

When you have an interest rate discussion with your bank, what are you offering in return?

 

There are ways you can improve the risk profile of your business, and therefore lessen the amount of capital, reducing the bank’s cost of lending to you.

 

Risk pricing is not new and has been prevalent in the agri debt market since the GFC. There are three key aspects to how a bank assesses the risk in your business.

  1. Viability (Probably of Default). This is based on the historical performance and the outlook for the business. This is also influenced by your equity within the business and your ability to raise external capital to meet obligations.
  2. Security (Loss given Default). This is based on the security offered to the bank, and what type of security it is. i.e. A Loan to Value ratio (LVR) of 40% is much more attractive to a bank than an LVR of 60%. In addition, land is more valuable (or less risky) for security than livestock.
  3. You (Personal Factor). Banks are now more than ever making both subjective and objective judgments on you and your ability to manage your business through the ups and downs.

These are the types of questions banks are asking themselves about you and your business…

 

What is the track record of the business? How experienced are the key principals? How well you can articulate your business, what are the strengths and how well do you mitigate any weaknesses? How can you explain your financial performance and how does that link into the outlook for your business? How well do you do typically perform vs budget? What changes have you made in the business to make it more resilient? Do you have a strategy that the bank can understand? How have you performed in a down durn? How did you fund losses? What independent advice do you have for the governance or leadership in your business?

 

If you do not answer these questions, the bank will answer them for you…

 

So, what are you doing to present your business to the bank?

 

Every interaction with the bank is an opportunity to articulate the strength of your business. Tell your bank you want 6 monthly reviews. Align them with key dates in your farming and financial year. They will already be reviewing your business at least annually, so why not take control of that?

 

We typically aim for an annual review with the bank around a month either side of balance date. The topics discussed are along the lines of:

  1. Presentation of Interim Financial Results for the Season vs budget. What went well, what are the work-ons.
  2. Presentation of the Strategy for the season ahead, what are the key focuses for the season, which have been driven from the FY20 results.
  3. Budget for the season ahead, funding requirements and debt repayment goals and any major capital projects for the year ahead
  4. Rollover/Extension of any term lending expiring

Around 4-6 months into the financial year is a good time to have an interim review. That will focus on:

  1. Delivery of the financial statements, which really is a confirmation of the numbers already presented at annual review
  2. Update on any strategy changes in the year as per previous
  3. Any changes to the forecast for the season due to prices, climatic etc

Covenant Reporting

 

Throughout the rest of the year, typically on a monthly or bi-monthly basis, we present variance reporting to the bank which covers off actual results vs budgets.

 

It is common now in Agri Lending to have covenants in place. It is very important to understand covenants on your lending, and the potential consequences of breach of those covenants.

 

Covenant reporting is another opportunity to showcase the strength of your business. Report to the bank need, but take the time to understand and explain any variances.

 

With positive variances, link it to management decisions if that’s how it resulted, and explain how it might improve the budgeted financial position throughout the year. With negative variances, understand and articulate the implications on working capital position or key strategic goals. Discuss what management decisions have been made to mitigate any impact.

 

This will help improve the risk profile of your business as it strongly links to the Personal Factor assessment – your ability to understand and manage the risks within your business.

 

Interest Rate Review

 

Influencing how the bank sees the key management and leadership of your business is the best way to influence funding costs. By providing high-quality reporting to the bank that clearly articulates where the business is going, how it is performing vs budget, why management decisions were made and the progression towards strategic goals is the best way to improve the bank’s view of the business.

 

Let’s be honest, Banks are still banks. Passing on savings from your improved credit rating is still a commercial decision the bank needs to make. When having an interest rate discussion with your bank, spend time setting expectations which link specific credit outcomes and milestones to interest rate savings. I.e. If I achieve x, what will that do to my interest rate?

 

Competition

 

The agri debt market is imperfect and there is clearly a difference in approach depending on whether your business has the ability to refinance or not. Our preference is always to derive gains by improving the relationship your business has with your current bank, because when times are tough these relationships matter. 

 

That is not always possible, so you need to understand different bank credit criteria and how your business aligns with those parameters. Then you will understand what funding options you have available to you, which can balance the power gradient in the relationship. Healthy competition between banks is a good thing and it leads to better outcomes.

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