National Australia sees farmers seeking loans amid crisis

National Australia Bank, the nation’s largest lender to farmers, is expecting its dairy clients to seek short-term credit to assist them as slumping milk prices have thrown the industry into a crisis.
Drought in the country’s east and a 20% fall in milk futures globally have farmers thinking of ways to tie them over during the crisis, by refinancing existing loans and taking on short-term debt, said Khan Horne, the Melbourne-based lender’s general manager for agribusiness. Such demand is expected to help maintain agriculture and dairy loan growth at 3% to 4% this year, he said by phone on Thursday.
“There will be a lot of carry on finance requested for dairy, as people try and look for funding for the short-term,” Horne said. “There will certainly be demand for extra credit. It’s too early to predict how big the demand can be.” While expressing confidence in farmers to weather the crisis – just as they overcame weaker prices, a cattle-export ban and a cyclone in the last four years – Horne said the lender would work with its agricultural customers on a “case-by-case basis” for their financing needs. National Australia has a 30% share of the sector’s loan market, with 550 bankers offering services from 112 locations around the country.
The Australian government this week said the dairy industry was facing a “crisis” as it announced an almost A$600mn ($432mn) support package for dairy farmers whose contract prices have been cut by milk firms Murray Goulburn Co-Operative Co and Fonterra Co-operative Group. Farmers will also get an extra household allowance and counselling support, Deputy Prime Minister Barnaby Joyce said on Wednesday.
National Australia’s gross loans to the agriculture and health industries stood at A$29bn as of March 31, the third-largest exposure at its business bank, according to filings from the bank.
Farm debt amounts to about A$65bn across the country and banks may need to provision for as much as A$10bn to cover soured loans, according to Mark McGovern, a senior lecturer at the Queensland University of Technology Business School. That’s double the level seen in 2012, he said.
“It’s up to the banks and farmers to work together sensibly with government to restructure and recapitalise the industry,” he said. “Such an extensive sectoral imbalance will not correct by itself.” A weakening Australian dollar and falling interest rates are providing a cushion to farmers, Horne said. The central bank has slashed its benchmark rate to a record low, while the currency has declined 5% this month.
“We’ve seen various cycles of both commodity prices and weather before,” Horne said. “This cycle, we are absolutely dealing with it case by case. We have a lot of faith in the Australian agriculture industry.”