Dealing With Rural Debt

Waimarino Bulletin, Volume 4, Issue 27, 2 December 1986, Page 1 (Supplement)

Dealing With Rural Debt

This article was written for the Gazette's farming supplement by Mangaohutu farmer, Mark Middleton, who attended a recent meeting in Taumarunui, which was addressed by Ray Chappell, general manager of the Rural Bank Finance Corporation.

At a recent meeting of over 80 farmers organised by Federated Farmers, Mr Ray Chappell, general manager of the Rural Bank Finance Corporation, outlined the bank's rural debt resturcturing package. Mr Chappell began his address by recaping on the background against which the scheme was developed. He said, "It is important to appreciate the thrust of

the scheme and the numerous factors which brought about its inception, and for farmers to appreciate the extent to which the scheme will be of direct help to them." Mr Chappell pointed to several reasons behind the financial crisis many farmers face - including high interest rates, changing agricultural policies, a reduction in export value (floating dollar), in the failure of some processing industries to

modernise, including a lack of product development and strategic marketing, subsidisation in foreign agricultural nations, high internal inflation and the extraordinary number of financial institutions and other agencies involved in rural financing and the cost of this to the farmer. A combination of these factors have brought a rapid deterioration of farmers'

financial base and overall economic position. "While this may be obvious to the farming community, the majority of people outside the industry still see the farmer as having high income levels," Mr Chappell said. Mr Chappell then outlined the reasons behind the dramatic drop in asset value of farms since 1983. He said, "Between 193575 the value of land was between 2.5 to 3.5 times that

of gross farm income and between 1975-1983 it rose to 6-7 times that of gross farm income, but then fell back to 2.5 to 3.5 times that of gross farm income in 1984-85, causing the 30%-70% drop in rural land values. "The overall effect of this is that we are now seeing land returning to a value

based on its production value," he said. Farmers during the past 18 months have seen a 35% drop in income and the extensive drop in product prices has brought substantial falls in farm profitability, asset values of land, stock and plant. The combination of these factors has

meant a very substantial number of farmers are left with negative cash flows and negative equity in their properties and have been able to implement the discounting policy scheme. The aims of the discounting scheme, he said, is to achieve - (a) a reduction in debt

(b) provide an incentive for all creditors to restructure the remaining dfbt onto a basis which can be serviced by the farmer. To the farmer, discounting reduces the principal sum owed by a farmer to the Rural Bank Finance CorpoContinued on P5

Dealing With Rural Debt

Continued from P1 ration and the effect is to restore or increase his equity in his property and to make the position of lenders who rank behind the Rural Bank Finance Corporation much more secure. Therefore the likelihood of subsequent mortgagees conducting a forced sale is substantially reduced. The success of the scheme depends largely on the participation and co-operation of all creditors in 'farm finance meetings' where an outline of the asset and liability position, along with the viability, can be assessed and proposals for restructuring can be considered.

During this restructuring process the basic cash flow guidelines need to be outlined. These include: ★ Farm working expenditure at least up to maintenance level. ★ An acceptable level of personal drawings - approximately $8,000 per annum. ★ Provision for normal debt servicing, being both interest and principal. ★ No school fees if normal services are available. The ability to reach a satisfactory conclusion at a 'farm finance meeting' revolves around the mediation skills of an independent chairman. The chairman is nominated by the Rural Bank, stock and station industry, banks, Federated Farmers and other parties and is not representing the Rural Bank. The chairman seeks to achieve a satisfactory decision for both secured and unsecured creditors and it is important that all creditors participate in the 'farm finance meeting'. Finally, the farmer or mortgagor and spouse will be present at the beginning of the meeting and whether they remain is a decision for the chairman. This decision is assessed by the ability of all parties to have full and frank discussions and if the chairman sees their presence inhibiting progress he will ask the mortgagors to leave. The farmer may be accompanied by his accountant, solicitor or farm advisor. Mr Chappell summarised his address by saying that the discounting scheme is available to all Rural Bank clients and not just those with severe cash flow problems. He sees debt discounting having six main objectives: ★ Relieves the farmer's debt and provides equity. ★ The interest and principal make up of the charge changes - the interest increases which is tax deductable. ★ The loan principal written off is tax free. ★ The bank's charges are stabilised at a maximum level. ★ When interest rates come

down the Rural Bank's charges are substantially reduced and acts as a catalyst to bring all creditors together to tackle the second immediate problem - cash flow. He stressed the scheme will not solve every case, but it is an important mechanism to restructure the industry and restore confidence in the agricultural sector and set the stage for a period of renewed profitability and prosperity.