Measures suggested for finance problems

Press, Volume CXI, Issue 32702, 3 September 1971, Page 19

Measures suggested for finance problems

A suggestion that the State Advances Corporation should be empowered to buy land offered voluntarily by farmers either leaving the industry or wishing to remain in it was made by Mr R. J. Stanbridge, a Commonwealth Scholar, in a paper on “Debt and the Viability of Farming in New Zealand” given to the conference of the New Zealand Society of Farm Management at Lincoln last week.

In the first case it could be reorganised into economic units and in the latter case rented back to the fanners concerned. Mr Stanbridge made these suggestions in the course of a number of far reaching proposals to improve the efficiency of the farm credit market. Earlier, he concluded, from a survey of institutions supplying funds, that the indications were that both current short term and long term sources of finance were likely to be attracted away, in relative terms, from the farm sector. This was largely a result of the changing importance of agriculture in the growing economy. Mr Stanbridge said, for instance, that the compound rate of increase in trading bank advances to agriculture had been at the rate of 3 per cent per year since 1957. This compared with a compound rate of increase of 4.9 per cent per year for all advances. The rate of increase in agricultural lending by the trading banks had, therefore, been growing, at less than the average rate. What he believed to be of concern about this was that agriculture was increasingly proving to be an unattractive source of investment for the trading banks. Mr Stanbridge said that lending money to farmers in itself was a very unprofitable use of the resources of stock firms.

With a decrease in profitability within the farm sector, he said there was even greater internal pressure on stock firms to diversify and many of the alternative uses of funds were far more profitable than agricultural lending and business, and as such must attract funds. “I therefore anticipate that »he rate of increase in farm lending by stock firms in the next few years will start to fall, as stock firms reduce further their relative commitment to agriculture ...

“Agriculture in New Zealand has certainly been a privileged sector—obtaining cheap credit from trading banks, stock firms and the State Advances Corporation,” said Mr Stanbridge. “As an economist, I contend that there is no economic case for any one sector receiving subsidised rates. Indeed, if a case is put up for such discriminatory rates it should be for new developing industries, of which we are not aware of the performance, rather than established sectors of the economy, such as agriculture, where we do have a great deal more knowledge of future potential. “I therefore accept that farm sector interest rates must rise in line with other rates in the economy. Indeed, trading banks and stock firms collectively agree that farmers are not aware of the rates they are paying, and that availability of credit is a far more important factor than interest rates.

“The second concept with which I am concerned is that of property ownership. I believe that one of the fundamental goals of any farmer is to own his land. On the other hand, I believe that one of the fundamental goals of a householder is to own his own house. If the householder cannot afford to buy his house, then is the community going to help him—or is he going to have to rent his house. The point I

am making, is that I do not regard entry to farming as a right, and I do not regard farm ownership as a right.

“I consider it completely inequitable for the rest of the community to assist the new farmer to purchase his land, Whether it be through tax or interest rate concessions, or direct subsidy, when in the ultimate limit, the farmer has preserved his standard of living and an asset, and the taxpayer, who has indirectly contributed to this asset, has nothing. “I contend that the community’s willingness to tolerate farm purchase as a right, has led to an upward pressure on land prices, and a complete disregard by some farmers of the economics of land purchasing. In addition, I consider that the refinance requirement every generation leads to an additional net injection of capital into the sector, that further lowers the rate of return to assets employed.

“I am therefore suggesting that it may be desirable to reconsider the whole concept of property ownership. “This could be practically expressed through a reexamination of the role of the State Advances Corporation, which to date has been limited to that of a passive lending institution. I have let my imagination run a little wild, but consider that this organisation, with its highly efficient trained staff, has the potential to play a dynamic role in the future farm credit market. I suggest that the corporation be empowered to buy land voluntarily from farmers wishing to either leave or remain in the sector. “In the first instance, land could be parcelled into economic units, and in the second could be rented back to fanners at ‘reasonable’ rents. Rents themselves could be a dynamic device, manipulated downwards in times of economic depression and conversely. “In addition, 1 can imagine the corporation ‘offering’ units to prospective applicants, eligibility being based on ability rather than inheritance, in much the same way as we are offered employment. This could conceivably lead to a system of promotion and demotion in the farm sector, in an attempt to place each farmer on a property commensurate with his ability. Implicit in such a state land ownership scheme would be the need for job security, and the need for some arrangement for full recompense for improvements on the property affected by the tenant.”

Turning to problems of short-term finance, Mr Stanbridge said, “I consider that the trading banks are the right and proper place for the provision of short-term finance to agriculture. It is ironic that in the United Kingdom, with a small farm sector, the trading banks play the leading role in the short-term farm credit market. We have shown that the farm sector is at present unattractive to the trading banks. I believe that there are two ways of improving this. “First, the release of interest rates from their present tight controls and the removal of agriculture’s present favoured interest rate position would lead to an immediate freer use of the price mechanism as a device for allocation of funds. In this way, bankers would be at least more favourably inclined to rural lending.

“In the second instance, we have said that banks are interested in collateral business. Many ' farmers currently use their stock firm as a ‘bank,’ and stock firms currently hold an estimated s6om of farmers’ deposits. Stock firms have indicated, both publicly and privately, that they do not utilise these deposits in their businesses. On the other hand, such deposits, if held by the trading bank system, would substantially increase the attractiveness of rural sector lending. Even though depositors are likely to be different individually from borrowers, I therefore suggest that in addition to interest rate control relaxations, such a transfer of deposits from stock firms to trading banks would increase the rate of leh'ding by banks to the rural sector.

“Such a move would reduce the stock firm commitment to agriculture, which I believe would lead to greater efficiency of resource use, both to the stock firms themselves, by substantially increasing their liquidity and improving their capital gearing situation, and the economy at large. I would hope that stock firms’ credit commitment to agriculture would in future be limited strictly to minor seasonal purposes . . .”

With a relaxation of existing controls and restrictions on trading banks, Mr Stanbridge said that there was also scope for increasing bank participation in medium-term as well as short-term finance of agripulture.

“My major conclusions can be posed in the form of two questions,” said Mr Stanbridge. “First, are we prepared' to re-examine the whole concept of farm property ownership, and thus help to remove a major obstacle in many cases to farm expansion and development? And second, are we prepared to continue to inject capital into agriculture at favourable rates of interest, bearing ' in mind the possible misallocation effects to the economy as a whole?”