'Character-building’ year faces troubled farmers

Press, 21 May 1982, Page 9

'Character-building’ year faces troubled farmers

By

DAVID LUCAS

Many farmers already stretched to their financial limits by inflation and the summer drought, could be in even deeper trouble in the next few months.'

Already some have decided to quit farming for more profitable ventures and others could be forced to sell because they are unable to meet high debt-servicing charges.

But with a tightening of the availability of loan finance — to be expected after an election year — prospects for a successful sale are not bright, especially for marginally economic units. The market for farms is described as being in buyers’ favour because of the large number available and the shortage of mortgage money.

Buyers can afford to be selective and some sellers are leaving up to 50 per cent of the purchase price in the property to encourage a sale. The “Farms for Sale” classified columns of “The Press”, give a good indication of the large number of farms on the market within the circulation area.

More than 120 farms, several over 1000 hectares in size, were advertised on a recent Saturday compared with about 80 at the cor- - responding date last year and about 70 last November.

Real Estate agents in Christchurch say that farms with a good cash flow such as dairy and broiler units and small horticultural units near Christchurch, were meeting satisfactory sales but little interest was being shown in marginally economic or less attractive properties. Most farms for sale are grazing propositions.

The migration of Southland farmers to Canterbury has virtually stopped during recent months. Usually there is a steady stream of Southlanders shifting north, but with Canterbury in the grip of a severe drought and Southland experiencing a

good year, they are content to stay in the south. Many sheep farmers have a cash flow problem at present, especially those who recently borrowed money to buy land or finance development.

Because of difficulty in refinancing mortgages and the prospect of no significant further income until the sale of-next year’s fat lambs and hogget wool, some farmers are considering either selling part of their land or replacing their present farm with a smaller property in a less favourable area which requires a lower debt level. Devoting part of their farm to cropping instead of solely sheep and beef farming is another alternative being looked at by many farmers to supplement their income in the short term.

Farmers can apply for financial assistance to help them weather the drought from the Rural Bank and also from stock firms and trading banks. The Canterbury office of the Rural Bank has received a lot of inquiries from farmers regarding assistance.

And according to the manager of a Canterbury stock firm, his company was almost stretched to the limit in providing help to droughtstricken farmers. However, some farmers are reluctant to commit themselves to borrowing more money which all has to be repaid at some stage, he said. 'i “After two years of drought and continuing inflation some farmers ''have chucked in the towel. I have never known so many farms on the market."

The tight money market has caused city investors — or “Hereford Street farmers” — to be less active in recent months, according to a spokesman for a large Canterbury real estate firm.

The uncertainty in markets for farm products, lack of adequate returns, and stabilising land values have also contributed to the decreasing interest in farming. According to a spokesman for a Canterbury stock firm, his staff believed land values had started dropping during the last fortnight. A Christchurch farm accountant, Mr P. S. Alexander, said that land values had plateaued out recently, and although prices for farms are still at levels that had been accepted during the last 12 months, lower prices should be expected. As land values stabilised, the profitability of farms was becoming more important, said Mr Alexander. “If land values are going to remain constant or drop, then the profitability aspect is going to become more critical than ever before. Clients, bankers, stock firms and potential mortgagees are already starting to quietly look very carefully at this aspect,” said Mr Alexander. Although droughts during the last two years had been a major reason for the present financial problems of farmers, many other factors were involved, said Mr Alexander.

“Without any doubt in my mind the major problem with the great majority of my own farming clients is a lack of basic profitability.” Mr Alexander said he was meeting quite a steady stream of farmers who had working capital problems which had been basically caused by the drought. Other contributing factors included inflation of working costs, plant replacement problems, high interest rates and steadily increasing stock numbers with associated problems. A number of his clients would have severe working capital overdraft peaks in November and December this year, said Mr Alexander.

The Rural Bank had indicated that it was prepared to assist where required in the O' ises of stock food because of the drought, but there would still be working capital problems during the next 12 months. "Even with Rural Bank support, all we are doing is substituting one debt for another which all has to be serviced and all has to be repaid.” Cash flow forecasting — or budgeting — will become a more important part of farming than it has been in recent years. “This can be very timeconsuming and farming being what it is the estimates can easily be made inaccurate. However, it is still the best guide we have towards cash and working capital implications over the following 12 months.” A number of farmers who had bought land in recent years on a fairly highlygeared basis and with high debt servicing per stock unit would experience a stressful period during the next 12 months based on present farm prices and costs, according to Mr Alexander. "It is a time to run lean and hungry and a high debt servicing cost per stock unit will be a very treadmill-like situation.” Mr Alexander said some of his clients who. have not owned their properties for a number of years, who were not particularly highlygeared regarding their debt

servicing, but who were basically sound farmers, would go through a reasonably painful 12 months. These farmers had been caught in droughts for two years with rising working costs and lack of basic ’profitability, but had not done too much wrong from a farm management point of view, he said. If land values remain constant or fall, the next 12 months could see a period of rationalisation with the basic lack of profitability, which is inherent in most New Zealand farming situations, becoming much more important.

“It looks as though the next 12 months could be character-building,” said Mr Alexander.

The morale of the farming community has declined during the last 12 months as farming became more and more unprofitable, said Mr D. A. Stone, a farm accountant at Greta Valley, North Canterbury. “Generally, people have had enough’ although many have not yet faced the reality of poor financial returns,” he said.

With operating capital being used to purchase feed as v§jl as normal farm expenditure, many farmers would not be able to balance their books at the end of this financial year, said Mr Stone, who estimated about half of the number of the farmers he deals with would be in this category. The Rural Bank had indicated that it would assist in this disastrous situation, said Mr Stone. But some farmers had received financial assistance last year and it was not known how the Rural Bank would look upon their applications.

Although some farmers had decided to sell because of financial problems, the large number of farms on the market was the result of several factors, said Mr Stone.

A number of farmers approaching retirement who could not want to continue coping with inflation had decided to give up farming, but in the past' these farmers would normally have continued farming and making a reasonable living. Other farms were being

sold because the return on the capital invested was not sufficient to encourage a farmer to continue farming, especially if this family included members who wanted to invest the capital in other forms of business. And the object of establishing more than one son in farming often required the family farm to be offered for sale and replaced by two smaller properties. The large number of farms on the market had been boosted by well-established farmers who wanted to change their properties, said Mr Stone. Because of less competition for farms, buyers could pick and choose a farm suitable for their needs.

The large number of farms for sale is causing concern in the farming community. The chairman of the Oxford branch of Federated Farmers (Mr G. L. B. Burnett) said a significant number of farms in the Oxford area were for sale and farmers were worried at the direction in which the farming industry was heading. An Oxford resident, Mr J. A. Fursdon, said there were at least 20 farms — ranging from economic units to 50 and 70 acre blocks of bare land — for sale in the small Oxford County. With the increased cost of servicing debts, some farmers were selling their farms to buy a cheaper property, possibly further out and smaller to reduce their debt level, said Mr Burnett. Mr Burnett said a lot of people did not realise the bad position farmers were in. Prospects for next year did not look bright because wool weights and lambing percentages were sure to be down for next season. Farms in the Oxford area were severely affected by the drought which followed close behind damage caused by grass grub and porina.