Debt is the elephant in the room for farmers
Farmers will need to rein in debt to stay viable, claims Westpac Agribusiness WA head of grains Chris Moore.
Speaking at the WAFarmers annual conference, Mr Moore said worldwide there was 30 per cent less money available now than five years ago as Europe and the US grappled with financial woes.
In a climate where Greece and Portugal are unlikely to be able to pay off their debt and Asia's growth is still demanding more capital, Mr Moore said the cost of finance was unlikely to fall.
What that means, is that farmers are going to have to move away from a growth model reliant on high debt loading and try to control their debt.
"In a period of growth debt is really useful - it allows you to buy an asset, there are some capital gains which farming has relied on very heavily in WA and it also helped you produce your income," Mr Moore said.
"That debt is now counter-productive and it's not helping them grow their wealth, it's actually starting to erode their wealth."
During that period, farmers enjoy relatively cheap finance, but Mr Moore said growers shouldn't pin hopes on those low finance costs returning.
"We will never see money as cheap as it was five years and the decade before," he said. "Money was far too cheap and the risk was not factored into the price.
"That 0.2 per cent that banks used to pay above the cash rate or the Reserve Bank Australia equivalent, those days are gone. We think it's going to land about 0.8 or 0.9 per cent in the long term, but that's going to take five or six years to get to whatever the new norm is."
In the past decade the cost of servicing debt had risen to be one of the top two or three items on the budget and growers will now have to consider finance as an input cost.
"That's the issue that's going to need to be addressed," Mr Moore said.
"With the price of money going up, the challenge for farmers is how do I bring my debt down over the next two to four years, so as the price of that debt begins to increase I'm less effected by it.
"For broadacre farming, it takes about three times as much money today than it did 10 years ago to produce the same crop for the same benefit.
"In WA we've seen a lot of people leave the industry over the last decade and that's been funded by debt.
"I think it's going to be more of a slow phase out (of farmers)… we won't see a mass exodus because I don't think there is anyone there to buy and help them exit."
What is going to be significant in terms of long term viability is farmers having, and sticking to, a plan B if seasons fail to deliver.
Mr Moore said there was an overwhelming sentiment of optimism among WA farmers, but that didn't always work in their favour.
"What if in September your crops have failed and you don't have the option to farm again next year - do you wait until January or February to make a decision on what you do?" he said.
"That plan B is knowing that if you get to a certain point I will do this, not I'm already there, maybe I'll give it another month or another season.
"I don't know what that plan B is for every individual customer, but I think it's important that every farmer is thinking of that, it doesn't matter if their equity is at 100 per cent or 30 per cent.
"The margin to cover things if that hope fails is no longer there and now there are quite dire financial consequences for people if they (continue) out of hope and belief - it's not a business model."
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