Current State of Play: The Appetite for Ag Banks

Ag Bank Appetite 

When assessing borrowers for a new farm loan, we’re generally seeing banks play a long game around commodity prices and using averages across a five-year period. Most Australian banks that offer agrifinance use what’s referred to as ‘year-in-year-out’ to determine cash flow and annual cashflow average when assessing whether or not a farming business has the ability to pay back the facility. This year-in-year-out approach takes into consideration where the business will be in four or five years and factors in the build-up of livestock numbers, seasonal prices and normalises one-off expenses. The SproutAg team have seen a measured and practical approach to this, in particular using the five-year averages for commodity prices.  

In addition to this, some of the rural banks have changed their policies around serviceability and have started to move away from fully amortising these loans in their assessments and are now using interest only coverage ratios. There are also some banks that have not changed their policies and this has impacted on their ability to service new loans, so this approach has been adopted by some while other banks are yet to catch up. For the banks yet to catch up, in most of their annual reports they have identified that they will be allocating more capital to their business bank portfolios and hopefully their agribusiness divisions.  

All in all, we’re still seeing a strong appetite from some of the banks, however there are others who have turned the tap off!. 

Agribusiness Finance Interest Rates 

As we move towards the end of 2023, We’re currently seeing some inconsistency across interest rates, with up to 2.70% difference over the last few weeks – a massive contrast! This large variation in rates offered by the banks is the unlike anything we have seen over SproutAg’s seven-year history. 

We have managed to help our clients navigate this though, recently placing a client’s banking out to tender. During this process we were able to help them reduce their rate of 9.05% down to 6.35%.  

What can you do about it? 

With all the changes happening in agrifinance, here are our top tips for you to navigate the rocky waters: 

  • If your operation needs more working capital for next year, we’d recommend starting the process now and completing it for the whole year ahead.
  • Cashflow and financial structure are more important than interest rates in the current market.  
  • If you have fodder or grass available, set up a livestock finance facility so you can take those good buying and trading opportunities when they present.  
  • Chat to an advisor about reducing your interested rate if it is more than 1% over the market. 

Will Current Economic Conditions Challenge Banks on Rural Lending?

Will Current Economic Conditions Challenge Banks on Rural Lending?

Rising interest rates and declining rural commodity markets are attracting many conversations around the state of the current economy. At SproutAg, we’ve had a number of discussions with clients around a bank’s approach to rural banking in today’s economy.

This month, we’re sharing our perspective on why we think that Australian banks will support agribusiness clients and continue to increase lending opportunities, despite the challenging economic times.

1. Australian Domestic Banks overweight in retail lending

At SproutAg, we believe that during challenging economic conditions banks are more likely to lend to sound business models. In comparison to historic portfolios when Australian banks are overweight in retail lending, they’ll look to adjust their “books”. With the increased cost of living, those who’ll come under pressure will be the fixed salary earners with high household debts in comparison to businesses with sound business models. By focusing on businesses (including farming businesses), banks are in a better position to off-set counter party risk.

2. Farming businesses do well during economic downturns

History shows us that during the Global Financial Crisis (2007-2009), commercial property valuations came under pressure and the ASX reduced in overall value along with other asset classes. Despite being in the middle of the millennial drought, rural land in comparison still fared well during this time. There were no large-scale losses, and overall, prices stayed consistent and went ahead. Based on history, farming businesses have an excellent track record during broader economic downturns in comparison to other asset classes, and the GFC is an example of this.

Recent commodity prices and rising interest rates have impacted the serviceability models of agriculture banks in Australia. At SproutAg, we see this with our finance providers in how they spread out your loan repayments over time, against what their view is of your ‘Year in, Year out’ business plan. However, based on these two factors, we still believe there will be a strong demand to grant ag loans to clients.

Managing Expectations During Succession Planning.

The Benefits of Maintaining Wages for Family Members.

Throughout 2023, we’ve seen on farm costs continuing to rise with inflation and interest rates, and overall returns year-on-year remain down. In times like this, we often see a reduction in wages for family members working on farm as a way to manage cashflow during a tough time. While we are big advocates for cashflow and profitability, we believe that maintaining the wages of family members is crucial to succession planning success. A family farm ownership structure has the ability to be nimble and agile as seasonal conditions change. This is often seen as a positive in comparison to a corporate operation and reducing wages when cashflow is tight can be tempting for family run operations. In comparison, corporate operations face more challenges to reduce costs to increase cashflow, due to higher fixed costs including wages. Reducing wages for family members in tough times links back to the Australian farming culture of ‘doing your time’ to obtain ownership of the farm. In today’s world, this culture can create disunity within family units, particularly as they start succession planning.
Compensation Systems for Sound Succession Outcomes.
It’s important for family farming operations to develop compensation systems, to ensure a smooth succession transition. Looking back, 15 years ago when there was a long stretch of drought known as the millennial drought, many family members returned home and worked for next to nothing. These family members are now in their 30’s and 40’s and there is often a level of expectation around farm ownership that was set when they returned to work 15 years ago. At the time, expectations were set, and decisions were put in place quickly and now, many family farming operations are working to untangle these decisions.We acknowledge that decisions are made to juggle cashflow, and paying a minimal wage or no wage at all to family members can seem like a solution at the time. However, our recommendation is to continue to pay family members the full market rate even when cashflow is tight to avoid confusion around compensation and potential expectations of the future ownership of the farm.

Sweat Equity in Farms.
The concept of ‘Sweat Equity’ refers to the value of work performed in lieu of payment. It suggests that the amount not paid per year (under market value), may be their equity in the future. It’s important to understand that when you pay family members lower than the market value as a business owner, you may unintentionally set an expectation around future ownership that can cause issues in the future.

Tips for Fair Farm Compensation.

Develop an overarching policy about family members in your operation that should include the following:
  • How family members enter and exit the business, linking this to future ownership.
  • A clear compensation plan that will enable to you to retain key people in the business.
  • A plan for how family members will receive feedback.
  • Standards and expectations for family values.
  • Have clear employment contracts, outlining expectation and performance with detailed job descriptions.
  • Develop operating manuals to illustrate ‘how things are done around here’.

Cashflow Forecasting…. Make it Rain

Cashflow Forecasting… Make it Rain.

Cash is king. However, there are times when cashflow can be affected by external influences. With the current commodity downturn (particular in the livestock industry), the team at SproutAg have been fielding a number of calls from clients wanting to discuss their cashflow and how best to structure it.

It’s important to keep cashflow at the forefront of your mind, and to consistently update your plans, particularly during times when your cashflow might be affected. It is normal for cashflow to fluctuate, and for cashflow forecasts to be updated as commodity trade and processes change.

With cashflow fluctuating across all industries, we encourage you to start reviewing your cashflow forecasts early. On top of this, we’ve noticed that processing times by banks has slowed down, and so we encourage you to keep ahead of the game by staying on top of your cashflow!

What do I need to Remember when Forecasting my Cashflow?

  1. Cashflow forecasting is about the “Cash in the Bank” and the availability of cash being cash and/or lines of credit/ loans.
  2. A cashflow forecast needs to be revisited on a regular basis, so it’s important that you have a rolling forecast in your business.
  3. Cashflow is about forecasting cash, not accounting and tax net profits.
  4. Starting your cashflow forecasting early is crucial to success. Start by looking towards the end of the next calendar year and the availability of cash/ lending limits that will be required.

Get some independent help with your cashflow forecast and call your SproutAg Advisor.