Farm finance

Budget Review 2013–14 Index

Robert Dossor

The Budget included a package of measures which are designed to support and assist farmers with high levels of debt and help improve their ongoing financial resilience. The Farm Finance measures will provide up to $420.0 million over two years in concessional loans to eligible primary production businesses.[1]

The concessional loans program will make available up to $30.0 million per annum for two years to each state and the Northern Territory (NT) for the provision of concessional loans to eligible primary production businesses. These loans will be administered by the relevant state or territory delivery agency. This amount of $30.0 million is half what was initially announced in April 2013.[2]

The problem

The Australian Bureau of Agricultural Research Economics and Science (ABARES) estimates that total farm debt (for broad-acre only farms – farms with paddocks larger than 4,000 square metres – not including dairy) as at 30 June 2013 averages $476,000.[3] For the dairy industry ABARES estimates that average farm debt as of 30 June 2012 is $701,500.[4]

Data from the Australian Bureau of Statistics (ABS) demonstrates that during the 2010–11 financial year (the most recent available), approximately 33 per cent of all agricultural businesses (as well as forestry and fishing) received either debt or equity finance.[5] Of these businesses, the bulk sought debt financing (31.6 per cent from a total of 33.2 per cent), while only 6.1 per cent sought equity financing (these two types of financing are not mutually exclusive – that is, businesses can have both debt and equity financing).[6] This proportion of businesses seeking finance is significantly above the average for industry sectors: in 2010–11 it was 16.6 per cent for all industries; the agricultural industry was the highest at 31.6 per cent.[7]

According to the ABS, farms mostly sought finance to maintain short-term cash flow or liquidity or ensure the survival of the business (51.5 per cent and 34.3 per cent respectively).[8] However, it is worth noting that farmers already had high levels of debt, as a result of the low interest rates of the 2000s which encouraged them to buy more (possibly unsustainable) land and scale up their operations.[9] Since then the high Australian dollar, softening commodity prices and pockets of drought have made lowering this debt difficult and significantly impacted farm profits and values.

The measures

The measures included in the Farm Finance package include a number of programs and schemes, the most significant of which is the provision of up to $420.0 million over two years in concessional loans.[10] These loans will be available to eligible primary production businesses for the purpose of productivity enhancement or debt refinancing from 1 July 2013. The loans will be for a maximum of $650,000 per business and available for a period of up to 20 years. The interest-only concessional loan component will be available for only five years, the remainder reverting to a market rate and requiring recipients to commence repaying the principal.[11]

The Budget does not specify what the concessional rate is or how the loan will otherwise operate, including what the market rate will be.

The Farm Finance package also includes:

changes to the Farm Management Deposit (FMD) scheme[12]
$6.3 million over three years to expand the Rural Financial Counselling Service by an additional 17 full-time equivalent counsellors from July 2013
$0.9 million over three years for a communication campaign to increase awareness of the assistance package and
the development of a nationally consistent approach to farm debt mediation process across all jurisdictions.[13]

Concern has been raised as to whether states and the NT will sign up to the measures.[14] States and the NT will have to administer the loans and so must sign on before their farmers can become eligible.

Reactions

Reactions to the initial announcements were moderately favourable. Brett Finlay, policy director at the National Farmers Federation said that the package was vital and ‘much needed’ to secure the future of an essential industry.[15]

The ABC reported one farmer as saying ‘… the Federal Government’s farm finance package could be extremely beneficial for farmers, particularly when paying overdrafts.’[16]

On the other hand, Queensland’s Agforce president Ian Burnett warned that ‘the farm finance package, while welcome, would not fix the crisis gripping much of rural Australia as drought widens and beef, fruit, vegetable and milk prices hit new lows.’[17]

[1]. Australian Government, Budget measures: budget paper no. 2, 2013–14, pp. 76–7, accessed 21 May 2013.

[2]. W Swan (Deputy Prime Minster and Treasurer) and J Ludwig (Minister for Agriculture, Fisheries and Forestry, Minister assisting on Queensland floods recovery), Fairer finance for Aussie farmers, media release 27 April 2013, accessed 23 May 2013.

[3]. While the Australian Bureau of Agriculture, Resource Economics and Science (ABARES) does not define the exact meaning of a ‘broad-acre farm’ it does explain what constitutes the broad-acre only sector. For this explanation see ABARES, Agricultural commodities: March quarter 2013, p. 156, accessed 22 May 2013 and Ibid., p. 169.

[4]. Ibid., p. 196.

[5]. Australian Bureau of Statistics (ABS), Selected characteristics of Australian businesses, 2010–11: business finance, cat. No. 8167.0, 2012, accessed 22 May 2013. Equity financing involves the issuing of shares, or the issuing additional shares of common stock to an investor while debt financing refers to borrowing money and not giving up ownership.

[6]. Ibid.

[7]. Ibid.

[8]. Ibid.

[9]. J Barrett and J-A Sprague, Farmers hit by debt, dollar, costs, Australian Financial Review, 27 April 2013, accessed 22 May 2013.

[10]. Budget measures: budget paper no. 2, 2013–14, op. cit., pp. 76–7.

[11]. Ibid.

[12]. For details of this change see the Department of Agriculture, Fisheries and Forestry, Farm finance: enhancing the farm management deposits scheme, Factsheet, May 2013, accessed 22 May 2013.

[13]. Budget measures: budget paper no. 2, 2013–14, op. cit., pp. 76–7.

[14]. Ibid.

[15]. S Neales, Farmers urge states to act on drought aid, The Australian, 6 May 2013, accessed 22 May 2013.

[16]. L Barbour, NSW farmers react to farm finance package, ABC Rural, 30 April 2013, accessed 21 May 2013.

[17]. Ibid.

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